10-K 1 mux-20171231x10k.htm 10-K mux_Current folio_10K

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                

Commission file number 001‑33190

MCEWEN MINING INC.

(Name of registrant as specified in its charter)

 

 

Colorado

84‑0796160

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

150 King Street West, Suite 2800, Toronto, Ontario Canada

M5H 1J9

(Address of principal executive offices)

(Zip Code)

(866) 441‑0690

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value

    

NYSE

Title of each class

 

Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging growth company in Rule 12b‑2 of the Exchange Act.

 

 

Large accelerated filer ☒

Accelerated filer  ☐

Non-accelerated filer ☐

Smaller reporting company ☐

(Do not check if a  smaller reporting company)

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐  No ☒

As of June 30, 2017 (the last business day of the registrant’s second fiscal quarter), the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was $613,010,302 based on the closing price of $2.63 per share as reported on the NYSE.  There were 337,054,594 shares of common stock outstanding on February 20, 2018.

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated into Part III, Items 10 through 14 of this report.

 

 

 


 

TABLE OF CONTENTS

PART I 

ITEM 1. 

BUSINESS

3

ITEM 1A. 

RISK FACTORS

7

ITEM 1B. 

UNRESOLVED STAFF COMMENTS

18

ITEM 2. 

PROPERTIES

18

ITEM 3. 

LEGAL PROCEEDINGS

34

ITEM 4. 

MINE SAFETY DISCLOSURES

34

PART II 

ITEM 5. 

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

35

ITEM 6. 

SELECTED FINANCIAL DATA

37

ITEM 7. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

38

ITEM 7A. 

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

68

ITEM 8. 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

70

ITEM 9. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

113

ITEM 9A. 

CONTROLS AND PROCEDURES

113

ITEM 9B. 

OTHER INFORMATION

113

PART III 

ITEM 10. 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

114

ITEM 11. 

EXECUTIVE COMPENSATION

114

ITEM 12. 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

114

ITEM 13. 

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

114

ITEM 14. 

PRINCIPAL ACCOUNTING FEES AND SERVICES

114

PART IV 

ITEM 15. 

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

114

ITEM 16. 

FORM 10-K SUMMARY

114

SIGNATURES 

115

EXHIBIT INDEX 

116

ADDITIONAL INFORMATION

Descriptions of agreements or other documents in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see the Exhibit Index at the end of this report for a complete list of those exhibits.

1


 

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

Please see the note under “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” for a description of special factors potentially affecting forward‑looking statements included in this report.

CAUTIONARY NOTE TO UNITED STATES INVESTORS—INFORMATION CONCERNING

PREPARATION OF RESOURCE AND RESERVE ESTIMATES

McEwen Mining Inc. (“McEwen Mining,” “we”, “our”, “us” or the “Company”) is required to prepare reports under the Securities Exchange Act of 1934 and the Canadian Securities Administrators’ National Instrument 43‑101 “Standards of Disclosure for Mineral Projects” (“NI 43‑101”), under the Canadian securities laws because we are listed on the Toronto Stock Exchange (“TSX”) and subject to Canadian securities laws. Standards under NI 43-101 are materially different than the standards generally permitted in reports filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”).

Definitions of terms under NI 43‑101 differ materially from the definitions of those and related terms in Industry Guide 7 (“Industry Guide 7”) promulgated by the SEC. Under U.S. standards, mineralization may not be classified as a “Reserve” unless a determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. Under Industry Guide 7 standards, a “Final” or “Bankable” feasibility study or other report is required to report reserves, the three-year historical average precious metals prices are used in any reserve or cash flow analysis to designate reserves and the primary environmental analysis or report must be filed with the appropriate government authority.

One consequence of these differences is that “reserves” calculated in accordance with Canadian standards may not be “Reserves” under Industry Guide 7 standards. U.S. investors should be aware that the only McEwen Mining properties with reserves as defined by Industry Guide 7 are the Black Fox mine, the Gold Bar project and the San Jose mine. All other properties do not have “Reserves” as defined by Industry Guide 7 and are cautioned not to assume that any part or all the disclosed mineralized material will be confirmed or converted into Industry Guide 7 compliant “Reserves”.

Further, since we have no reserves on some of our properties as defined in Industry Guide 7, we have in the past and will continue to expense substantially all design, construction and development costs with regard to those properties, even though these expenditures are expected to have a future economic benefit in excess of one year. Only certain types of property and equipment which have alternative uses or significant salvage value may be capitalized without proven and probable reserves. We also expense our asset retirement obligations on those properties. Companies that have reserves under Industry Guide 7 typically capitalize these costs, and subsequently depreciate or amortize them on a units‑of‑production basis as reserves are mined. Unlike these other companies, we depreciate or amortize any capitalized costs based on the most appropriate amortization method, which includes straight‑line or Units-of-production method over the estimated life of the mine, as determined by our internal mine plans. Because of these and other differences, our financial statements may not be comparable to the financial statements of mining companies that have established reserves.

Under NI 43‑101, we report measured, indicated and inferred resources, which are measurements that are generally not permitted in filings made with the SEC. The estimation of measured resources and indicated resources involve greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves under Industry Guide 7. U.S. investors are cautioned not to assume that any part of measured or indicated resources will ever be converted into economically mineable reserves. The estimation of inferred resources involves far greater uncertainty as to their existence and economic viability than the estimation of other categories of resources. Inferred Mineral Resources could be upgraded to Indicated Mineral Resources with continued exploration. Therefore, U.S. investors are also cautioned not to assume that all or any part of inferred resources exist, or that they can be legally or economically mined.

Canadian regulations permit the disclosure of resources in terms of “contained ounces” provided that the tonnes and grade for each resource are also disclosed; however, the SEC only permits issuers to report “mineralized material” in tonnage and average grade without reference to contained ounces. Under U.S. regulations, the tonnage and average grade described herein and other information disseminated to you would be characterized as mineralized material. We provide such disclosure about our properties to allow a means of comparing our projects to those of other companies in the mining industry, many of which are Canadian and report pursuant to NI 43‑101, and to comply with applicable disclosure requirements.

We also note that drill results are not indicative of mineralized material in other areas where we have mining interests. Furthermore, mineralized material identified on our properties does not and may never have demonstrated economic or legal viability.

RELIABILITY OF INFORMATION

Minera Santa Cruz S.A.(“MSC”), the owner of the San José mine, is responsible for and has supplied to us all reported results from the San José mine. The technical information contained herein with regard to the San José mine is, with few exceptions as noted, based entirely on information provided to us by MSC. Our joint venture partner, a subsidiary of Hochschild Mining plc, and its affiliates other than MSC do not accept responsibility for the use of project data or the adequacy or accuracy of this information.

 

2


 

PART I

ITEM 1.  BUSINESS

History and Organization

We are a mining and minerals production and exploration company focused on precious and base metals in Argentina, Mexico, Canada and the United States. On January 24, 2012, we changed our name from US Gold Corporation to McEwen Mining Inc. after the completion of the acquisition of Minera Andes Inc. (“Minera Andes”) by way of a statutory plan of arrangement under the laws of the Province of Alberta, Canada.

In 2017, we completed two acquisitions that established our operations in Canada.  On April 26, 2017, we completed the acquisition of Lexam VG Gold Inc. (“Lexam”) pursuant to a statutory Plan of Arrangement under Ontario law and Lexam became a wholly-owned subsidiary of our company. Lexam controls a cluster of four past-producing gold properties located in the Timmins district of northern Ontario, Canada, which we believe have the potential for both open-pit and underground mining.

On October 3, 2017, we completed the acquisition of additional mining assets located in the Timmins district of Ontario.  In a transaction with Primero Mining Corp., we acquired the Black Fox Complex, an operating underground precious metal mine, associated mining claims and equipment, the Black Fox-Stock Mill, and the Grey Fox and Froome projects, advanced-stage properties located near the Black Fox Complex. 

Following the acquisitions in 2017, we own 100% of the El Gallo 1 mine in the state of Sinaloa, Mexico, 100% of the Black Fox Complex in Timmins, Ontario, Canada, and a 49% interest in Minera Santa Cruz S.A. (“MSC”), the owner and operator of the producing San José mine in the province of Santa Cruz, Argentina, which is controlled by the majority owner of the joint venture, Hochschild Mining plc (“Hochschild”). In addition to our operating properties, we also hold interests in advanced stage and exploration stage properties and projects in Argentina, Mexico, Timmins, and the United States, including the Gold Bar (“Gold Bar”) and Los Azules (“Los Azules”) projects.

Our objective is to increase the value of our shares through the exploration and extraction of gold, silver and other valuable minerals. Other than the San José mine in Argentina, we generally conduct our activities as the sole operator, but we may enter into arrangements with other companies through joint venture or similar agreements in an effort to achieve our strategic objectives. We hold our mineral interests and property and operate our business through various subsidiary companies, and except for MSC, each of which is owned entirely, directly, or indirectly, by us.

Our principal executive office is located at 150 King Street West, Suite 2800, Toronto, Ontario, Canada M5H 1J9 and our telephone number is (866) 441-0690. We also maintain offices in San Juan, Argentina; Guamuchil, Mexico, Elko, Nevada (U.S.), and Matheson, Canada. Our website is www.mcewenmining.com. We make available our periodic reports and news releases and certain of our corporate governance documents, including our Code of Ethics, on our website. Our common stock is listed on the New York Stock Exchange (“NYSE”) and on the Toronto Stock Exchange (“TSX”) under the symbol “MUX”.

In this report, “McEwen Mining”, the “Company”, “our” and “we” refer to McEwen Mining Inc. together with our subsidiaries, unless otherwise noted. “Au” represents gold; “Ag” represents silver; “Cu” represents copper, “oz” represents troy ounce; “gpt” represents grams per metric tonne; “ft.” represents feet; “m” represents meter; “km” represents kilometer; and “sq.” represents square, and C$ refers to Canadian dollars. All our financial information is reported in United States (U.S.) dollars, unless otherwise noted.

Segment Information

Our operating segments include Mexico, MSC, Nevada, Los Azules and Canada. Canada became a new operating segment with the acquisition of Lexam and the Black Fox Complex in 2017. Financial information for each of our reportable segments can be found under Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of

3


 

Operations and Item 8. Financial Statements and Supplementary Data, Note 15. Our sales and long-lived assets, based on the location from which they originate, are geographically distributed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

Long‑Lived Assets

 

 

    

2017

    

2016

    

2015

    

2017

    

2016

    

2015

 

Mexico

 

83

%  

100

%  

100

%  

 7

%  

 7

%  

 6

%

Argentina(1)

 

 —

%  

 —

%  

 —

%  

67

%  

84

%  

85

%

United States

 

 —

%  

 —

%  

 —

%  

 9

%  

 9

%  

 9

%

Canada

 

17

%  

 —

%  

 —

%  

17

%  

 —

%  

 —

%

Other

 

 —

%  

 —

%  

 —

%  

 —

%  

 —

%  

 —

%

 

(1)

Includes our 49% equity investment in MSC.

 

Products

 

The end product at our gold and silver operations is either in the form of doré or concentrate. Doré is an alloy consisting primarily of gold and silver but also containing other impurity metals. Doré is sent to refiners to produce bullion that meets the required market standard of 99.95% gold and 99.9% silver. Ore concentrate, or simply concentrate, is raw ore that has been ground finely to a powdery product from which gangue (waste) is removed, thus concentrating the metal component. Slag and fine carbon are by-products of the gold production process left over after gold and silver have been separated which are sent to smelters for further recovery of metals.

 

Production from the El Gallo 1 mine consists of approximately 98% doré and 2% slag and fine carbon, whereas 100% of gold and silver production at the Black Fox mine is doré. Production from the San José mine consists of approximately 48% doré and 52% concentrate. 

 

During 2017, we reported the following consolidated production attributable to us:

 

 

 

 

 

 

 

 

    

Gold

    

Silver

    

Gold equivalent

Consolidated Production

 

ounces

 

ounces

 

ounces(1)

 

 

 

 

 

 

 

El Gallo 1 mine

 

46,446

 

18,586

 

46,694

Black Fox Complex(2)

 

14,268

 

804

 

14,279

San José mine (on 49% basis)

 

49,232

 

3,159,352

 

91,357

Total Production

 

109,946

 

3,178,742

 

152,330


(1)

Calculated using silver to gold ratio of 75:1

(2)

The Black Fox Complex was acquired effective October 3, 2017, so the figures represent a partial year of production.

Gold and silver bullion obtained from the doré produced in Mexico and Canada is sold at the prevailing spot market price. Gold and silver doré produced from the San José mine is sold at the prevailing spot market price based on the London fix. Concentrates are provisionally priced, whereby the selling price is subject to final adjustments at the end of a period ranging from 30 to 90 days after delivery to the customer. The final price is based on the market price at the relevant quotation point stipulated in the contract. Due to the time elapsed between shipment and the final settlement with the buyer, MSC must estimate the prices at which sales of metals will be settled. At the end of each financial reporting period, previously recorded provisional sales are adjusted to estimated settlement metals prices based on relevant forward market prices until final settlement with the buyer.

During 2017, total gold and silver sales were $55.8 million for the El Gallo 1 mine, $11.6 million for the Black Fox mine, and $227.1 million for the San José mine on a 100% basis.  Since we account for the San José mine using the equity method of accounting, we do not include revenue from the San José mine in the Consolidated Statement of Operations and Comprehensive (Loss) Income. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding production and operating results for our properties, and Item 8. Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies—Investments, for additional information regarding the equity method of accounting.

4


 

Like all metal producers, our operations are affected by fluctuations in metal prices. The following table presents the annual high, low and average daily London P.M. Fix prices per ounce for gold and London Fix prices per ounce for silver over the past three years and 2018 to the most recent practical date on the London Bullion Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold

 

Silver

 

Year

 

High

 

Low

 

Average

 

High

 

Low

 

Average

 

 

 

(in dollars per ounce)

 

2015

    

$

1,296

    

$

1,049

    

$

1,160

    

$

18.23

    

$

13.71

    

$

15.68

 

2016

 

 

1,366

 

 

1,077

 

 

1,251

 

 

20.71

 

 

13.58

 

 

17.14

 

2017

 

 

1,346

 

 

1,151

 

 

1,257

 

 

18.56

 

 

15.22

 

 

17.05

 

2018 (through February 16, 2018)

 

 

1,355

 

 

1,311

 

 

1,332

 

 

17.52

 

 

16.35

 

 

17.01

 

 

On February 16, 2018 the London P.M. Fix for gold was $1,352 per ounce, whereas the London Fix for silver was $16.84 per ounce.

Gold and Silver Processing Methods

Gold and silver are extracted from mineralized material by either milling or heap leaching depending on, among other things, the amount of gold and silver contained in the material, whether the material is naturally oxidized or not, the amenability of the material to treatment. At the El Gallo 1 mine, mineralized material is processed using heap leaching methods. Heap leaching consists of stacking crushed, oxidized material on impermeable pads, where a weak cyanide solution is applied to the surface of the heap to leach the gold and silver. The gold and silver‑bearing solution is then collected and processed into gold and silver into doré bars. Doré bars are then shipped from the mine to a third party refiner to obtain bullion.

At Black Fox, ore mined is initially crushed on-site, transported to the Black Fox mill site and fed to the mill’s crushing circuit.  Following processing and refining, the mill produces doré bars. Doré bars are then shipped from the mine to a third party refiner to obtain bullion.

The processing plant at the San José mine is composed of conventional crushing, grinding and flotation circuits. Approximately half of the silver‑gold flotation concentrate is subsequently processed in an intensive cyanide leaching circuit with the dissolved gold and silver recovered by electro-winning of a clarified solution followed by smelting to produce doré. The doré is then sent to refiners to obtain bullion. The balance of the flotation concentrate is filtered and shipped to a smelter for further processing.

Hedging Activities

Our strategy is to provide shareholders with exposure to gold and silver prices by selling our gold and silver ounces at spot market prices and consequently, we do not hedge our gold or silver sales. We may, however, from time to time, manage certain risks associated with fluctuations in foreign currencies using the derivatives market.

Gold and Silver Reserves

We have established gold and silver reserves at three of our properties, including San Jose, Black Fox and Gold Bar.  The portion of Proven and Probable gold and silver Reserves attributable to us for San Jose and Gold Bar as of December 31, 2017, is presented in Item 2. Properties

Competitive Business Conditions

We compete with many companies in the mining and mineral exploration and production industry, including large, established mining companies with substantial capabilities, personnel, and financial resources. There is a limited supply of desirable mineral lands available for claim‑staking, lease, or acquisition in Mexico, Argentina, Canada, or the United States, and other areas where we may conduct our mining or exploration activities. We may be at a competitive disadvantage in acquiring mineral properties, since we compete with these individuals and companies, many of which have greater financial resources and larger technical staffs than we do. From time to time, specific properties or areas which would otherwise be attractive to us for exploration or acquisition may be unavailable due to their previous acquisition by other companies or our lack of financial resources.

5


 

Competition in the industry is not limited to the acquisition of mineral properties, but also extends to the technical expertise to find, advance, and operate such properties; the labor to operate the properties; and the capital for the purpose of funding such exploration and development. Many competitors not only explore for and mine precious and base metals, but conduct refining and marketing operations on a world‑wide basis. Such competition may result in not only our company being unable to acquire desired properties, but to recruit or retain qualified employees or to acquire the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these resources would have a material adverse effect on our results of operation, financial condition and cash flows.

General Government Regulations

In Mexico, Argentina, Canada and the United States, we are subject to various governmental laws and regulations, including environmental regulations. Other than operating licenses for our mining and processing facilities and concessions granted under contracts with the host government, there are no third party patents, licenses or franchises material to our business.  The applicable laws and regulations applicable to us include:

·

mineral concession rights;

·

surface rights;

·

water rights;

·

mining royalties;

·

environmental laws; and

·

mining permits.

We believe that all of our properties are operated in compliance with all applicable governmental laws and regulations.

Customers

Production from the El Gallo 1 and Black Fox mines is sold as refined metal on the spot market or doré under the terms set out in a doré purchase agreement between us and the Bank of Nova Scotia (“Scotia”), a Canadian financial institution.  Under the terms of that agreement, dated July 2012, we have the option to sell approximately 90% of the gold and silver contained in doré bars produced at the El Gallo 1 and Black Fox mines prior to the completion of refining by the third party refiner, which normally takes approximately 10 to 15 business days.  During the year ended December 31, 2017, 98% and 98% of the sales made by El Gallo 1 mine and Black Fox mine were to Scotia, respectively, with no sales made through the doré purchase agreement. We also have an agreement to sell refined metal to a second Canadian financial institution.

During the year ended December 31, 2017, 74% of total sales from the San José mine were made to Republic Metals Corporation, Argo-Heraeus and LS Nikko Copper Inc. Republic Metals, a Florida corporation, is a purchaser of doré and accounted for 39% of that amount. Argo-Heraeus, a Swiss company, is a purchaser of doré, which accounted for 29% of such amount. LS Nikko Copper Inc., a South Korean company, is a purchaser of concentrate, which accounted for 32% of that amount. MSC has sales agreements with each of these purchasers.

In the event that our relationship with Scotia or MSC’s relationship with Republic Metals, Argo-Heraeus or LS Nikko Copper Inc. were interrupted for any reason, we believe that we or MSC could locate other purchasers for our products. However, any interruption would temporarily disrupt the sale of our products and could adversely affect our operating results.

Employees

As of December 31, 2017, we had 535 employees including 245 employees based in Mexico, 6 in Argentina, 20 in the United States, 24 in Toronto, Ontario, Canada, and 240 in Timmins, Ontario, Canada. All our employees based in Toronto work in an executive, technical or administrative position, while our employees in Mexico, Argentina, the United States, and Timmins include laborers, craftsmen, mining, geology and permitting specialists, information technologists, and various other support roles.

6


 

Some of our employees in Mexico are covered by union labor contracts and we believe we have good relations with our employees and their unions. We also frequently engage independent contractors in connection with certain administrative matters and the exploration of our properties, such as drillers, geophysicists, geologists, and other specialty technical disciplines.  As of December 31, 2017, MSC had 1,156 employees in Argentina.

 

ITEM 1A.  RISK FACTORS

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward‑looking statements that may be affected by several risk factors. The following information summarizes all material risks known to us as of the date of filing this report:

 

Risks Relating to Our Company

Our results of operations, cash flows and the value of our properties are highly dependent on the market prices of gold, silver, and copper and these prices can be volatile.

The profitability of our gold and silver mining operations and the value of our mining properties, are directly related to the market price of gold, silver and copper. The price of gold, silver and copper may also have a significant influence on the market price of our common stock. Historically, the market price of gold and silver has fluctuated significantly and is affected by numerous factors beyond our control. These factors include supply and demand fundamentals, global or national political or economic conditions, expectations with respect to the rate of inflation, the relative strength of the U.S. dollar and other currencies, interest rates, gold and silver sales and loans by central banks, forward sales by metal producers, accumulation and divestiture by exchange traded funds, and a number of other factors such as industrial and commercial demand.

 

We derive all of our revenue from the sale of gold and silver and our results of operations will fluctuate as the prices of these metals change.  A period of significant and sustained lower gold and silver prices would materially and adversely affect our results of operations and cash flows. The volatility of mineral prices represents a substantial risk which no amount of planning or technical expertise can fully eliminate. In the event mineral prices decline or remain low for prolonged periods of time, we might be unable to develop our properties, which may adversely affect our results of operations, financial performance and cash flows. An asset impairment charge may result from the occurrence of unexpected adverse events that impact our estimates of expected cash flows generated from our producing properties or the market value of our non-producing properties, including a material diminution in the price of gold and/or silver. 

 

Our results of operations have been and could continue to be materially and adversely affected by the impairment of assets.

 

During 2017, the price of gold, as measured by the London PM fix, fluctuated between $1,151 and  $1,346 per ounce. while the price of silver fluctuated between $15.22 and $18.56 per ounce.  As at February 16, 2018, gold, silver and copper prices were $1,352 per ounce, $16.84 per ounce, and $3.27 per pound, respectively.

 

Our Estimates of proven and probable reserves and mineralized material are based on interpretation and assumptions and may yield less mineral production under actual conditions than is currently estimated.

 

Unless otherwise indicated, proven and probable reserves and mineralization figures presented in our filings with securities regulatory authorities, including the SEC, news releases and other public statements that may be made from time to time, are based upon estimates made by both independent and our own internal geologists. Estimates of proven and probable reserves and mineralized material are subject to considerable uncertainty and are based, to a large extent, on the prices of gold and silver and interpretations of geologic data obtained from drill holes and other exploration techniques.  These prices and interpretations are subject to change.  If we determine that certain of our estimated reserves or mineralized material have become uneconomic, we may be forced to reduce our estimates.  Actual production may be significantly less than we expect.

 

When making determinations about whether to advance any of our projects to development, we rely upon such estimated calculations as to the mineralized material and grades of mineralization on our properties. Until ore is mined and processed, mineralized material and grades of mineralization must be considered as estimates only.  We cannot ensure that:

 

·

these estimates will be accurate; or

·

this mineralization can be mined or processed profitably.

7


 

 

Any material changes in mineral estimates and grades of mineralization may affect the economic viability of placing a property into production and such property’s return on capital. There can be no assurance that minerals recovered in small scale tests will be recovered in large‑scale tests under on‑site conditions or in production scale. Extended declines in market prices for gold and/or silver may render portions of our mineralization estimates uneconomic and result in reduced reported mineralization or adversely affect the commercial viability of one or more of our properties. Any material reductions in estimates of mineralization, or of our ability to extract this mineralization, could have a material adverse effect on our results of operations or financial condition.

 

Investors should also be aware that calculations of “Reserves” differ under SEC reporting standards and those under other international standards, such as Canada.  Investors should also be aware that mineralized material may never be converted into reserves.  See, CAUTIONARY NOTE TO UNITED STATES INVESTORS-INFORMATION CONCERNING PREPARATION OF RESOURCE AND RESERVE ESTIMATES

 

We may be unable to replace gold and silver reserves as they become depleted.

 

Like all metal producers, we must continually replace reserves depleted by production to maintain production levels over the long term and provide a return on invested capital. Depleted reserves can be replaced in several ways, including expanding known ore bodies, by locating new deposits or acquiring interests in reserves from third parties. Exploration is highly speculative in nature, involves many risks and uncertainties and is frequently unsuccessful in discovering significant mineralization. Accordingly, our current or future exploration programs may not result in new mineral producing operations. Even if significant mineralization is discovered, it will likely take many years from the initial phases of exploration until commencement of production, during which time the economic feasibility of production may change.

 

From time to time, we may acquire ore reserves from other parties, as we did in 2017. Such acquisitions are based on an analysis of a variety of factors including historical operating results, estimates of and assumptions regarding the extent of ore reserves, the timing of production from such reserves and cash and other operating costs. In addition, we may rely on data and reports prepared by third parties (including the ability to permit and comply with existing regulations) and which may contain information or data that we are unable to independently verify or confirm in advance. Other than historical operating results, all of these factors are uncertain and may have an impact on our revenue, our cash flow and other operating issues, as well as contributing to the uncertainties related to the process used to estimate ore reserves.

 

As a result of these uncertainties, our exploration programs and acquisitions may not result in the expansion or replacement of our current production with new ore reserves or operations, which could have a material adverse effect on our business, prospects, results of operations and financial position.

 

The Black Fox and Lexam acquisitions may not achieve their intended results and may result in us assuming unanticipated liabilities.

 

The Black Fox and Lexam acquisitions completed in 2017 subject us to many risks.  We may discover title defects or adverse environmental or other conditions relating to the properties acquired in the transactions of which we are currently unaware. Environmental, title, and other problems could reduce the value of the properties to us, and, depending on the circumstances, we could have limited or no recourse to the sellers with respect to those problems. We have assumed substantially all of the liabilities associated with the acquired properties and would be entitled to indemnification in connection with those liabilities in only limited circumstances, for limited periods and in limited amounts. Potential remedies may not be adequate to cover any liabilities we incur, and such liabilities could be significant. Also, it is uncertain whether our existing operations and the acquired properties and operations can be integrated in an efficient and effective manner. In addition, the success of the Black Fox acquisition depends on, among other things, the accuracy of our assessment of the reserves associated with the acquired properties and operating costs, among other factors. These assessments were based to a significant degree on information provided by the sellers and we cannot guarantee their accuracy. Although the acquired properties are subject to many of the risks and uncertainties to which acquisitions we pursue are subject generally, risks associated with the Black Fox acquisition, in particular, include those associated with our ability to operate efficiently in a new area and the significant size of the transactions in the aggregate.

 

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Our business requires substantial capital investment and we may be unable to raise additional funding on favorable terms to develop additional mining operations.

 

We will need to obtain additional capital, either in the form of debt or equity financing, to fund construction of the Gold Bar project and to continue our development and exploration activities on other projects.  Our working capital balance at December 31, 2017, along with expected cash generated from mining operations at El Gallo 1 and Black Fox mines and any dividends received from MSC, is not expected to be sufficient to allow us to fund the construction of Gold Bar or to continue our operations indefinitely. Should we also decide to develop the Los Azules project,  we will require significant capital beyond our existing resources.  Our ability to obtain necessary funding, in turn, depends upon a number of factors, including the state of the economy and applicable commodity prices. We may not be successful in obtaining the required financing for Gold Bar or other purposes, on terms that are favorable to us or at all, in which case, our ability to replace reserves and continue operating would be adversely affected. Failure to obtain such additional financing could result in delay or indefinite postponement of further exploration or potential development and the possible partial or total loss of our interest in certain properties.

If we do not hedge our exposure to reductions in gold and silver prices, we may be subject to significant reductions in price.

We do not use hedging transactions with respect to any of our gold and silver production and we do not expect to do so in the future.  Accordingly, we may be exposed to more significant price fluctuations if gold and/or silver prices decline. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations.

 

We own our 49% interest in the San José mine, under the terms of an option and joint venture agreement (“OJVA”), and therefore we are unable to control all aspects of the exploration and development of, and, production from this property.

 

Our interest in the San José mine is subject to the risks normally associated with the conduct of joint ventures. A disagreement between joint venture partners on how to conduct business efficiently, the inability of joint venture partners to meet their obligations to the joint venture or third parties, or litigation arising between joint venture partners regarding joint venture matters could have a material adverse effect on the viability of our interests held through the joint venture.

 

We conduct operations in a number of foreign countries and are exposed to legal, political and social risks associated with those operations.

 

All of our revenue in 2017 was generated by operations outside the United States.  Exploration, development, production and closure activities in many countries are potentially subject to heightened political and social risks that are beyond our control and could result in increased costs, capacity constraints and potential disruptions to our business. These risks include the possible unilateral cancellation or forced renegotiation of contracts in which we may, directly or indirectly, have an interest, unfavorable changes in foreign laws and regulations, royalty and tax increases (including taxes associated with the import or export of goods), risks associated with consumption taxes in Mexico (VAT) and Canada (HST), income tax refund recovery and collection processes, changes in US legislation as applicable to foreign operations, claims by governmental entities or indigenous communities, expropriation or nationalization of property and other risks arising out of foreign sovereignty over areas in which our operations are conducted. The right to import and export gold and silver may depend on obtaining certain licenses and quotas, which could be delayed or denied at the discretion of the relevant regulatory authorities, or could become subject to new taxes or duties imposed by U.S. or foreign jurisdictions, which could have a material adverse effect on our business, financial condition, or future prospects. In addition, our rights under local law may be less secure in countries where judicial systems are susceptible to manipulation and intimidation by government agencies, non-governmental organizations or civic groups.

 

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. See Note 9 Income and mining tax to the Consolidated Financial Statements for additional details.

 

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Any of these developments could require us to curtail or terminate operations at our mines, incur significant costs to renegotiate contracts, meet newly-imposed environmental or other standards, pay greater royalties or higher prices for labor or services and recognize higher taxes, or experience significant delays or obstacles in the recovery of VAT/HST or income tax refunds owed, which could materially and adversely affect financial condition, results of operations and cash flows.

 

Our ongoing and future success depends on developing and maintaining productive relationships with the communities, including indigenous peoples, and other stakeholders in our operating locations. Notwithstanding our ongoing efforts, local communities and stakeholders can become dissatisfied with our activities or the level of benefits provided, which may result in civil unrest, protests, direct action or campaigns against us. Any such occurrences could materially and adversely affect our financial condition, results of operations and cash flows.

 

Our operations in Argentina and Mexico are subject to political and social risks.

 

With respect to our San José mine, there are risks relating to an uncertain or unpredictable political and economic environment in Argentina. For instance, Argentina defaulted on foreign debt repayments and on the repayment on a number of official loans to multinational organizations in 2002 and 2003, and defaulted again on its bonds in 2014 after failing to reach an agreement with certain of its bondholders. In 2008, the Argentine government also reassessed its policy and practice in respect of export duties and began levying export duties on mining companies operating in the country. In 2012, Argentina’s President announced the nationalization of the majority stake of Yacimientos Petrolíferos Fiscales (YPF), Argentina’s largest oil company. In 2013, Argentina’s federal Income Tax Statute was amended to include a 10% income tax withholding on dividend distributions by Argentine corporations, and the capital gains exception for non‑resident taxpayers was repealed. In 2015, Argentina’s federal government removed export taxes for dore and concentrate products while the local authorities in the province of Santa Cruz substituted a provincial reserve tax with a lower provincial Corporate Social Responsibility (“CSR”) payment. In December 2017, Argentina enacted comprehensive tax reform (Law No. 27,430 (the Law)), through publication in the Official Gazette. The Law is generally effective 1 January 2018. Specifically, the Law introduces amendments to corporate income tax, personal income tax, value added tax (VAT), tax procedural law, criminal tax law, social security contributions, excise tax, tax on fuels, and tax on the transfer of real estate. It also establishes a special regime comprising an optional revaluation of assets for income tax purposes. The law  gradually reduces the corporate tax rate to 25 % from 35 % by 2020. It also proposes to tax profits from financial investment for the first time, introducing a levy of 15 % for foreign currency-denominated and inflation-linked instruments and 5 percent for peso-denominated debt.

 

With respect to our El Gallo 1 mine in Mexico, there has been a consistent level of violence and crime relating to drug cartels and gangs in Sinaloa State where we operate, and in other regions of Mexico. Our facility at El Gallo was robbed in 2015.  On January 10, 2018 the US State Department issued a Level 4 (“do not travel”) warning with respect to five Mexican states, including Sinaloa State due to violence related to the drug cartels.  These events may disrupt our ability to carry out exploration and mining activities and affect the safety and security of our employees and contractors.

 

In Mexico, in October 2013, the Mexican lower house passed a bill proposing a tax‑deductible mining royalty of 7.5% on earnings before the deduction of interest, taxes, depreciation and amortization, along with an additional 0.5% on precious metals revenue for precious metals mining companies.  The Mexican Senate approved the provisions of the Tax Reform on October 31, 2013. The effective date of the law was January 1, 2014. On February 11, 2014, we filed an Amparo with the Supreme Court to appeal the constitutionality of the Tax Reform.  On November 15, 2017, the Supreme Court ruled against us and remanded the case to the lower court.  Our obligation to pay the tax is presently stayed pending a final ruling from the court.  A ruling against us would result in an additional expense and may result in additional expenses in the future.  As of December 31, 2017, we have not generated taxable income subject to the 7.5% mining royalty, and have accrued $1.2 million for the 0.5% precious metals royalty.

 

Reform of the General Mining Law in the United States could adversely affect our results of operations.

 

Periodically, members of the U.S. Congress have introduced bills which would supplant or alter the provisions of the General Mining Law of 1872, which governs the unpatented claims that we control with respect to our U.S. properties. One such amendment has become law and has imposed a moratorium on the patenting of mining claims, which reduced the security of title provided by unpatented claims such as those on our U.S. properties. If additional legislation is enacted, it could substantially increase the cost of holding unpatented mining claims by requiring payment of royalties, and could significantly impair our ability to develop mineral estimates on unpatented mining claims. Such bills have proposed,

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among other things, to make permanent the patent moratorium, to impose a federal royalty on production from unpatented mining claims and to declare certain lands as unsuitable for mining. Although it is impossible to predict at this time what royalties may be imposed in the future, the imposition of such royalties could adversely affect the potential for development of such mining claims, and the economics of existing operating mines on federal unpatented mining claims. Passage of such legislation could adversely affect our business.

 

Our business is subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti‑bribery laws, a breach or violation of which could lead to civil and criminal fines and penalties, loss of licenses or permits and reputational harm.

 

We operate in certain jurisdictions that have experienced governmental and private sector corruption to some degree. The U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Violations of these laws, or allegations of such violations, could lead to civil and criminal fines and penalties, litigation, and loss of operating licenses or permits, and may damage our reputation, which could have a material adverse effect on our business, financial position and results of operations. There can be no assurance that our internal control policies and procedures always will protect us from recklessness, fraudulent behavior, dishonesty or other inappropriate acts committed by our affiliates, employees or agents. As such, our corporate policies and processes may not prevent all potential breaches of law or other governance practices.

 

We are subject to foreign currency risk.

 

While we transact most of our business in U.S. dollars, expenses, such as labor, operating supplies, and property and equipment, are denominated in Canadian dollars, Mexican pesos or Argentine pesos. As a result, currency exchange fluctuations may impact our operating costs. The appreciation of non‑U.S. dollar currencies against the U.S. dollar increases costs and the cost of purchasing property and equipment in U.S. dollar terms in Mexico, Argentina and Canada, which can adversely impact our operating results and cash flows. Conversely, a depreciation of non‑U.S. dollar currencies usually decreases operating costs and property and equipment purchases in U.S. dollar terms in foreign countries.

 

The value of cash and cash equivalents denominated in foreign currencies also fluctuates with changes in currency exchange rates. Appreciation of non‑U.S. dollar currencies results in a foreign currency gain on such investments and a depreciation in non‑U.S. dollar currencies results in a loss. We have not utilized market risk sensitive instruments to manage our exposure to foreign currency exchange rates but may in the future actively manage our exposure to foreign currency exchange rate risk. We also hold portions of our cash reserves in Canadian, Mexican and Argentine currency.

 

Development at Los Azules presents development challenges that may negatively affect, if not completely negate, the feasibility of development of the property.

 

The Los Azules property is located in a remote location that is accessed by 75 miles (120 kilometers) of unimproved dirt road with eight river crossings and two mountain passes above 13,451 feet (4,100 meters). Even assuming that technical difficulties associated with this remote location can be overcome, the significant capital costs required to develop the project may make the project uneconomical.  If the long term price of copper were to remain low or decrease significantly below the current price or capital cost estimates increase significantly, Los Azules may not be feasible for development, and we may have to write‑off the remaining carrying value of the asset. Furthermore, the project’s economic feasibility has not yet been demonstrated through a full feasibility study. The PEA is preliminary in nature, includes NI 43‑101 mineral resources that are considered too speculative geologically to have economic considerations applied to them that would allow them to be categorized as mineral reserves either under Industry Guide 7 or NI 43‑101, and there is no certainty that the PEA will be realized.

 

We may acquire additional exploration stage properties and we may face negative reactions if reserves are not located on acquired properties.

 

We have in the past and may in the future acquire additional exploration stage properties. There can be no assurance that we have or will be able to complete the acquisition of such properties at reasonable prices or on favorable terms and that reserves will be identified on any properties that we acquire. We may also experience negative reactions from the financial markets if we are unable to successfully complete acquisitions of additional properties or if reserves are not located on acquired properties. These factors may adversely affect the trading price of our common stock or our financial condition or results of operations.

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The nature of mineral exploration and production activities involves a high degree of risk and the possibility of uninsured losses that could materially and adversely affect our operations.

 

Exploration for and production of minerals is highly speculative and involves greater risk than many other businesses. Many exploration programs do not result in the discovery of mineralization, and any mineralization discovered may not be of sufficient quantity or quality to be profitably mined. Few properties that are explored are ultimately advanced to production. Our current exploration efforts are, and future development and mining operations we conduct will be, subject to all of the operating hazards and risks normally incident to exploring for and developing mineral properties, such as, but not limited to:

 

·

economically insufficient mineralized material;

·

fluctuations in production costs that may make mining uneconomical;

·

availability of labor, contractors, engineers, power, transportation and infrastructure;

·

labor disputes;

·

potential delays related to social, public health, and community issues;

·

negotiations with aboriginal groups or local populations affecting our efforts to explore, develop or produce gold and silver deposits;

·

unanticipated variations in grade and other geologic problems;

·

environmental hazards;

·

water conditions;

·

difficult surface or underground conditions;

·

metallurgical and other processing problems;

·

mechanical and equipment performance problems;

·

industrial accidents, personal injury, fire, flooding, cave‑ins, landslides and other natural disasters; and

·

decrease in reserves or mineralized material due to a lower silver, gold or copper price.

Any of these risks can materially and adversely affect, among other things, the development of properties, production quantities and rates, costs and expenditures, potential revenues and production dates. We currently have no insurance to guard against any of these risks, except in very limited circumstances. If we determine that capitalized costs associated with any of our mineral interests are not likely to be recovered, we would incur a write‑down of our investment in these interests. All of these factors may result in losses in relation to amounts spent which are not recoverable.

 

We do not insure against all risks to which we may be subject in our operations.

 

While we currently maintain insurance policies to insure against general commercial liability claims and physical assets at our properties in Argentina, Canada, Mexico, and the United States, we do not maintain insurance to cover all of the potential risks associated with our operations. Our other exploration projects have no existing infrastructure for which we insure. We may also be unable to obtain insurance to cover other risks at economically feasible premiums or at all. Insurance coverage may not continue to be available, or may not be adequate to cover liabilities. We might also become subject to liability for environmental, pollution or other hazards associated with mineral exploration and production which may not be insured against, which may exceed the limits of our insurance coverage or which we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that

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could materially adversely affect our financial condition and our ability to fund activities on our property. A significant loss could force us to reduce or terminate our operations.

 

Our operations are subject to permitting requirements which could require us to delay, suspend or terminate our operations on our mining properties.

 

Our mining operations, including ongoing exploration drilling programs, require permits from various state and federal governments, including permits for the use of water and for drilling wells for water. We may be unable to obtain these permits in a timely manner, on reasonable terms or on terms that provide us sufficient resources to develop our properties, or at all. Even if we are able to obtain such permits, the time required by the permitting process can be significant. If we cannot obtain or maintain the necessary permits, or if there is a delay in receiving these permits, our timetable and business plan for exploration of our properties will be adversely affected, which may in turn adversely affect our results of operations, financial condition, cash flows and market price of our securities.

 

Due to an increased level of non‑governmental organization and aboriginal and local group activity targeting the mining industry, the potential for the government or process instituted by non-governmental organizations, aboriginal and local, to delay the issuance of permits or impose new requirements or conditions upon mining operations may be increased. Any changes in government policies may be costly to comply with and may delay mining operations. Future changes in such laws and regulations, if any, may adversely affect our operations, make our operations prohibitively expensive, or prohibit them altogether. If our interests are materially adversely affected as a result of a violation of applicable laws, regulations, or permitting requirements or a change in applicable law or regulations, it would have a significant negative impact on the value of our company and could have a significant impact on our stock price.

 

Title to mineral properties can be uncertain, and we are at risk of loss of ownership of one or more of our properties.

 

Our ability to explore and operate our properties depends on the validity of our title to that property. Our U.S. mineral properties include leases of unpatented mining claims, as well as unpatented mining and mill site claims, which we control directly. Unpatented mining claims provide only possessory title and their validity is often subject to contest by third parties or the federal government, which makes the validity of unpatented mining claims uncertain and generally riskier.  Similarly, Canadian mineral properties consist of patented and unpatented claims which each have their respective risks and uncertainties.  Further, there may be title defects or additional rights which are not recorded on the title.  Our concessions in Mexico are subject to continuing government regulation and failure to adhere to such regulations will result in termination of the concession. Similarly, under Argentine Law, failure to comply with applicable conditions may result in the termination of the concession. Uncertainties inherent in mineral properties relate to such things as the sufficiency of mineral discovery, proper posting and marking of boundaries, assessment work and possible conflicts with other claims not determinable from public record. We have not obtained title opinions covering our entire property, with the attendant risk that title to some claims, particularly title to undeveloped property, may be defective. There may be valid challenges to the title to our property which, if successful, could impair development and/or operations.

 

We cannot ensure that we will have an adequate supply of water to complete desired exploration or development of our mining properties.

 

Our mining operations require significant quantities of water for mining, ore processing and related support facilities. Our operations in Argentina, Mexico, Canada and the United States are in areas where water is scarce and competition among users for continuing access to water is significant. Continuous production at our mines is dependent on our ability to maintain our water rights and claims and to defeat claims adverse to our current water uses in legal proceedings. Although each of our operations currently has sufficient water rights and claims to cover its operational demands, we cannot predict the potential outcome of pending or future legal proceedings relating to our water rights, claims and uses. Water shortages may also result from weather or environmental and climate impacts out of the Company’s control.

 

Our continuing reclamation obligations at Tonkin, Gold Bar, Black Fox, El Gallo, and other properties could require significant additional expenditures.

 

We are responsible for the reclamation obligations related to disturbances located on all our properties. On February 10, 2014, we submitted to the BLM an amendment to the original Plan of operations for the Tonkin Complex that incorporated the final plan for permanent closure, which was approved by the BLM on September 21, 2015, including our $3.6 million estimate of anticipated reclamation requirements, for which a financial guarantee has been put in place. In order for the

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Company to commence construction at its Gold Bar project, a reclamation bond of $15.0 million was approved by the BLM on August 25, 2017, reflecting an estimate of the anticipated reclamation requirements, for which a financial guarantee has been put in place. As at December 31, 2017 the extent of the disturbances at Gold Bar were limited to early site preparation work. An initial reclamation obligation of $0.1 million was recorded to reflect this work.

 

Pursuant to the Black Fox acquisition, which closed in October 2017, the Company filed three updated closure plans with the Ministry of Northern Development and Mines (“MNDM”). The three updated closure plans included the Black Fox Mine, the Stock Mill, and the Grey Fox Advanced Exploration Project, which have closure costs of C$15.1 million, C$5.2 million, and C$0.4 million, respectively. The updated closure plans were filed on September 21, 2017, and accepted by the MNDM on September 27, 2017. These financial assurances were satisfied by the Company through financial guarantees. 

 

Regarding the El Gallo 1 mine and El Gallo 2 project, we have not posted a bond in Mexico as none is required by the current legislation; however, we have recorded a liability based on the estimated amount of our reclamation obligations.

 

There is a risk that any surety bond or recorded liability, even if increased based on the analysis and work performed to update the reclamation obligations, could be inadequate to cover the actual costs of reclamation when carried out. The satisfaction of bonding requirements and continuing reclamation obligations will require a significant amount of capital. Further, it is possible that the BLM may request that the Company provides additional long-term financing supported by a long-term trust for an amount that cannot be determined at this point. There is a risk that we will be unable to fund any additional bonding requirements or that the surety bonds may no longer be accepted by the governmental agencies as satisfactory reclamation coverage, in which case we would be required to replace the surety bonding with cash, and further, that the regulatory authorities may increase reclamation and bonding requirements to such a degree that it would not be commercially reasonable to continue exploration activities, which may adversely affect our results of operations, financial performance and cash flows.

 

Our ongoing operations and past mining activities are subject to environmental risks, which could expose us to significant liability and delay, suspension or termination of our operations.

 

All aspects of our operations are subject to Argentine, Mexican, Canadian and American federal, state and local environmental regulation. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste, including cyanide. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non‑compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for us and our officers, directors and employees. Future changes in environmental regulation, if any, may adversely affect our operations, make our operations prohibitively expensive, or prohibit them altogether. Environmental hazards may exist on our properties that are unknown to us at the present and that have been caused by us, or previous owners or operators, or that may have occurred naturally. We utilize explosives in our business, which could cause injury to our personnel, and damage to our equipment or assets. Mining properties from the companies we have acquired may cause us to be liable for remediating any damage that those companies may have caused. The liability could include response costs for removing or remediating the release and damage to natural resources, including ground water, as well as the payment of fines and penalties. Failure to comply with applicable environmental laws, regulations and permitting requirements may also result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities, causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions.

 

Our industry is highly competitive, attractive mineral lands are scarce, and we may not be able to obtain quality properties.

 

We compete with many companies in the mining industry, including large, established mining companies with substantial capabilities, personnel and financial resources. There is a limited supply of desirable mineral lands available for claim staking, lease or acquisition in Argentina, Mexico, Canada and the United States, and other areas where we may conduct exploration activities. We may be at a competitive disadvantage in acquiring mineral properties, since we compete with these individuals and companies, many of which have greater financial resources and larger technical staffs than we do. From time to time, specific properties or areas which would otherwise be attractive to us for exploration or acquisition may be unavailable to us due to their previous acquisition by other companies or our lack of financial resources. Competition in the industry is not limited to the acquisition of mineral properties but also extends to the technical expertise

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to find, advance, and operate such properties; the labor to operate the properties; and the capital for the purpose of funding such properties. Many competitors not only explore for and mine precious metals, but conduct refining and marketing operations on a world‑wide basis. Such competition may result in our Company being unable not only to acquire desired properties, but to recruit or retain qualified employees or to acquire the capital necessary to fund our operation and advance our properties. Our inability to compete with other companies for these resources would have a material adverse effect on our results of operation, financial condition and cash flows.

 

We rely on contractors to conduct a significant portion of our operations and construction projects.

 

A significant portion of our operations and construction projects are currently conducted in whole or in part by contractors, including specifically our operations at the El Gallo 1 and Black Fox mines and the construction at the Gold Bar Project. As a result, our operations are subject to a number of risks, some of which are outside our control, including:

 

·

Negotiating agreements with contractors on acceptable terms;

·

The inability to replace a contractor and its operating equipment in the event that either party terminates the agreement;

·

Reduced control and oversight over those aspects of operations which are the responsibility of the contractor;

·

Failure of a contractor to perform under its agreement;

·

Interruption of operations or increased costs in the event that a contractor ceases its business due to insolvency or other unforeseen events;

·

Failure of a contractor to comply with applicable legal and regulatory requirements, to the extent it is responsible for such compliance; and

·

Problems of a contractor with managing its workforce, labor unrest or other related employment issues.

In addition, we may incur liability to third parties as a result of the actions of our contractors. The occurrence of one or more of these risks could adversely affect our results of operations and financial position.

 

If our employees or contractors engage in a strike, work stoppage or other slowdown, we could experience business disruptions or increased costs.

 

As of December 31, 2017, a number of our employees were represented by different trade unions and work councils which subject us to employment arrangements very similar to collective bargaining agreements. Further, most of our employees are based in foreign locations. The laws of certain foreign countries may place restrictions on our ability to take certain employee-related actions or require that we conduct additional negotiations with trade unions, works councils or other governmental authorities before we can take such actions.

 

If the employees or contractors at the San José, El Gallo 1 or Black Fox mines were to engage in a strike, work stoppage, or other slowdown in the future, we could experience a significant disruption of our operations. Such disruption could interfere with our business operations and could lead to decreased productivity, increased labor costs, and lost revenue.

 

We may not be successful in negotiating new collective bargaining agreements or other employment arrangements when the current ones expire. Furthermore, future labor negotiations could result in significant increases in our labor costs. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition, and results of operations.

 

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

 

We face various security threats, including attempts by third parties to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the safety of our employees; threats to the security of our infrastructure; and threats from terrorist acts. There can be no assurance that the procedures and controls we use to monitor these threats and mitigate our exposure to them will be sufficient in preventing them from materializing. If any of these events were to

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materialize, they could lead to losses of sensitive information, critical infrastructure, personnel or capabilities essential to our operations and could have a material adverse effect on our reputation, financial condition, results of operations, or cash flows.

 

Our technologies, systems and networks, and those of our business partners, may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, theft of property or other disruption of our business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. A cyber incident involving our information systems and related infrastructure, or that of our business partners, could disrupt our business plans and negatively impact our operations. Although to date we have not experienced any significant cyber-attacks, there can be no assurance that we will not be the target of such attacks in the future. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any security vulnerabilities.

 

The laws of the State of Colorado, our Articles of Incorporation and agreements with certain officers and directors may protect our directors from certain types of lawsuits.

 

The laws of the State of Colorado provide that our directors will not be liable to us or our shareholders for monetary damages for all but certain types of conduct as directors of the Company. Our Articles of Incorporation permit us to indemnify our directors and officers against all damages incurred in connection with our business to the fullest extent provided or allowed by law, including through stand‑alone indemnity agreements. We have also entered into indemnification agreements with our executive officers and directors which require that we indemnify them against certain liabilities incurred by them in their capacity as such. The exculpation provisions may have the effect of preventing shareholders from recovering damages against our directors caused by their negligence, poor judgment or other circumstances. The indemnification provisions may require us to use our limited assets to defend our directors and officers against claims, including claims arising out of their negligence, poor judgment, or other circumstances.

 

Risks Relating to Our Common Stock

 

A small number of existing shareholders own a significant portion of McEwen Mining common stock, which could limit your ability to influence the outcome of any shareholder vote.

 

As of February 21, 2018, Mr. McEwen beneficially owned approximately 23% of our outstanding shares, or 79.2 million of the 337.1 million shares of McEwen Mining common stock. Van Eck Associates Corporation beneficially owns 10.1% of our outstanding common stock.  Under our Articles of Incorporation and the laws of the State of Colorado, the vote of the holders of a majority of the shares voting at a meeting at which a quorum is present is generally required to approve most shareholder action. As a result, Mr. McEwen and/or the other beneficial owner will be able to significantly influence the outcome of shareholder votes for the foreseeable future, including votes concerning the election of directors, amendments to our Articles of Incorporation or proposed mergers, acquisitions or other significant corporate transactions.

 

Our stock price may be volatile, and as a result you could lose all or part of your investment.

 

In addition to other risk factors identified herein and to volatility associated with equity securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:

·

Changes in the worldwide price for gold, silver and/or copper;

·

Disappointing results from our exploration or production efforts;

·

Producing at rates lower than those targeted;

·

Political and regulatory risks;

·

Weather conditions, including both unusually heavy rains and unusually light rains or drought;

·

Failure to meet our revenue or profit goals or operating budget;

16


 

·

Decline in demand for our common stock;

·

Downward revisions in securities analysts’ estimates or changes in general market conditions;

·

Technological innovations by competitors or in competing technologies;

·

Investor perception of our industry or our prospects;

·

Actions by government central banks; and

·

General economic trends.

Stock markets in general have in the past and may in the future experience extreme price and volume fluctuations. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. Adverse price fluctuations may lead to threatened or actual delisting of our common stock from the NYSE. As a result, you may be unable to resell your shares at a desired price.

 

There is no guarantee that the Company will continue to declare returns of capital and/or other distributions.

 

On June 18, 2015, the Board of Directors declared an annual return of capital of $0.01 per share of common stock, payable semi-annually.  The most recent return of capital installment of $0.005 was paid on February 14, 2018. Any determination to continue this return of capital on our common stock will be based primarily upon our financial condition, results of operations and capital requirements, including for capital expenditures and acquisitions, and our Board of Directors’ determination that the return of capital is in the best interest of our stockholders and in compliance with all laws and agreements applicable to the Company.   

 

Gains recognized by non‑U.S. holders and non‑U.S. persons holding any interest in the Company other than solely as a creditor (including, for example, interests in the form of our convertible debt, if any) on the sale or other disposition of our securities may be subject to U.S. federal income tax.

 

We believe that we currently are a “United States real property holding corporation” under section 897(c) of the Internal Revenue Code (the “Code”), or USRPHC, and that there is a substantial likelihood that we will continue to be a USRPHC in the future. Subject to certain exceptions, securities (other than securities that provide no interest in a corporation other than solely as a creditor) issued by a corporation that has been a USRPHC at any time during the preceding five years (or the non‑U.S. holder’s holding period for such securities, if shorter) are treated as U.S. real property interests, or USRPIs, and a gain recognized by a non‑U.S. holder on the sale or other disposition of a USRPI is subject to regular U.S. federal income tax, on a net basis at graduated rates, as if such gain were effectively connected with the conduct by such holder of a U.S. trade or business. If a gain recognized by a non‑U.S. holder from the sale or other disposition of our common stock or other securities is subject to regular net basis income tax under these rules, the transferee of such common stock or other securities may be required to deduct and withhold a tax equal to 10% of the gross amount paid to the non‑U.S. holder with respect to the sale or other disposition, unless certain exceptions apply. Any tax withheld may be credited against the U.S. federal income tax owed by the non‑U.S. holder for the year in which the sale or other disposition occurs.

 

The future issuances of our common stock will dilute current shareholders and may reduce the market price of our common stock.

 

Under certain circumstances, our board of directors has the authority to authorize the offer and sale of additional securities without the vote of or notice to existing shareholders. We may issue equity in the future in connection with acquisitions, strategic transactions or for other purposes. Based on the need for additional capital to fund expected growth, it is likely that we will issue additional securities to provide such capital and that such additional issuances may involve a significant number of shares of our common stock. Issuance of additional securities in the future will dilute the percentage interest of existing shareholders and may reduce the market price of our common stock and any other outstanding securities. Furthermore, the sale of a significant amount of our common stock by any selling security holders, including Mr. McEwen, may depress the price of our common stock. As a result, you may lose all or a portion of your investment.

 

17


 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

We classify our mineral properties into the reportable segments consistent with the manner in which they are grouped in Item 8. Financial Statements and Supplemental Data, Note 15 Operating Segment Reporting and subdivide them within each segment by their respective stage of development: “Production Properties”, “Advanced-Stage Properties” and “Exploration Properties”.  Advanced-stage properties consist of properties for which advanced studies and reports have been completed indicating the presence of economically mineable mineralized material or in some cases, proven and probable reserves, and for which we have obtained or are in the process of obtaining the required permitting. Our designation of certain properties as “Production Properties” or “Advanced-stage Properties” should not suggest that we have proven or probable reserves at those properties as defined by the SEC Industry Guide 7.

Our significant production, advanced-stage and exploration properties are described below.

C:\Users\Jacob Lobaszewski\AppData\Local\Microsoft\Windows\INetCache\Content.Word\map (003).png

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SEGMENT:  MEXICO

The following map depicts the location of our major properties included in the Mexico Operations segment, which the El Gallo 1 mine and the El Gallo 2 project described in the sections below:

Picture 2

The following table summarizes the Company’s land position in Mexico as of December 31, 2017:

 

 

 

 

 

 

 

Mexico Mineral Property Interest

 

Claims

 

Square Miles

 

Square  Kilometers

El Gallo 1 mine

 

 7

 

 8

 

20

El Gallo 2 project

 

 5

 

144

 

372

Other Mexico properties

 

38

 

528

 

1,369

Total Mexico Properties

 

50

 

680

 

1,761

 

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Production Properties

El Gallo 1 mine, Mexico (100% owned)

For detailed information on the El Gallo 1 mine production statistics and financial results, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview and History

We own 100% of the El Gallo 1 mine. The El Gallo 1 mine is the open‑pit gold mine and heap leach operation formerly known as the Magistral mine. Modern exploration activities at the Magistral site and surrounding properties started in early 1995 and were carried out by several companies. Commercial production was initiated in 2002 by Nevada Pacific Gold Ltd. and the mine produced approximately 70,000 ounces of gold from 2002 to 2005 before it was placed on care and maintenance for economic reasons.  We acquired Nevada Pacific Gold in 2007, performed limited exploration activities, refurbished the infrastructure and completed the first gold pour in September 2012, with commercial production commencing on January 1, 2013.  During the year ended December 31, 2017, the El Gallo 1 mine produced a total of 46,446 ounces of gold and 18,586 ounces of silver, and has produced a cumulative total of 240,149 ounces of gold and 124,878 ounces of silver since recommencement of commercial production.

The El Gallo 1 mine consists of 8 square miles (20 square km) of concessions. Concession titles are granted under Mexican mining law. Mining concessions are subject to annual work requirements and payment of annual surface taxes which are assessed and levied on a semi-annual basis in accordance with Mexican law. An annual lease agreement for surface access to the El Gallo 1 mine is currently in place.

Location and Access

The El Gallo 1 mine and the surrounding properties are in northwestern Mexico in the western foothills of the Sierra Madre Occidental mountain range, within the State of Sinaloa in the Mocorito Municipality, approximately 60 miles (100 km) by air northwest of the Culiacan, the Sinaloa State capital city. The concessions are located approximately 2.5 miles (4.0 km) by road from the town of Mocorito, which is approximately 10 miles (16 km) from the city of Guamuchil. Access is by paved or well-maintained two-way dirt roads.

Geology and Mineralization

Mineralization among the various deposits of the El Gallo 1 mine area is generally similar. The mineralized structural zones consist of quartz stockwork, breccia, and/or local quartz veins, all occurring within propylitically altered andesitic volcanic rocks. The mineralization is generally characterized by gold accompanied by iron oxide and variable copper, zinc and lead in sulfides.

Facilities and Infrastructure

The El Gallo 1 mine property has well‑developed infrastructure including electricity, roads and high-speed internet access. There is a truck shop, a warehouse, a fuel depot, core logging facilities, an explosives magazine, heap leach pads, process ponds, an assay laboratory, a three stage crushing plant, an ADR process plant and an administrative office. The laboratory is equipped to process all assays (blasthole samples from the mine, core, chips and soil) and incorporates fire assaying, atomic absorption, and ICP-OES equipment. Also included is a metallurgical lab capable of conducting leach bottle rolls and column tests to determine cyanide leaching amenability and gold and silver recoveries of ores amenable to cyanide leaching.

In 2017, we initiated the construction of a sulfidation-acidification recovery (SAR) circuit for the removal of copper, zinc and lead from pregnant leach solutions. This will increase the adsorption efficiency at the ADR plant to recover gold and silver from the pregnant leach solutions obtained from the heap leach. The SAR circuit is expected to be commissioned in the first quarter of 2018.

Mining operations and site security are performed by contractors with company employees in the management, administrative and processing areas.

The primary water supply for the El Gallo 1 mine comes from two operating water wells located 0.9 miles (1.5 km) from the process facility. Wells pump water into a raw water pond, which is then used for operations. The wells combined with

20


 

capture of 32 inches (~830 mm) of average local annual precipitation provide sufficient supply for the El Gallo 1 mine production.

Mining activities will cease in the second quarter of 2018 while we expect leaching activities will continue until 2020 or later, as long as it remains economical to do so. Exploration work is ongoing in an effort to extend the mine life beyond 2018 and make new discoveries in the district.

Advanced-stage Properties

El Gallo 2 Project, Mexico (100% owned)

Access and Location

The El Gallo 2 project is located 3.0 miles (4.8 km) northwest of our El Gallo 1 mine.

Overview and History

El Gallo 2 is a prospective silver mining operation.  Although there is a long history of mining in the area, only minimal amount of mining appears to have occurred at El Gallo 2 based on field observations. There is no recorded history of prior exploration having occurred at El Gallo 2. We acquired El Gallo 2 and the surrounding mineral concessions in connection with the acquisition of Nevada Pacific Gold in 2007. In 2008, we initiated exploration in the district. After conducting rotary drilling in the area, we were able to confirm the grade and thickness of the silver resource in January 2009. 

A feasibility study (‘‘FS’’) was completed on the El Gallo 2 project in September 2012. As a result of changes in commodity prices since the publication of the FS, we are of the view that the 2012 FS is no longer current and should not be relied on. A final decision to proceed with the construction of El Gallo 2 has not been made and alternatives to reduce capital and operating costs continue to be examined. Any decision to proceed would be dependent on improved silver prices, improved project economics, and securing financing on terms that are more favorable than those that were available at the time of completion of the FS. During 2017, we conducted further studies on the feasibility and development of the El Gallo 2 project.  However, as of December 31, 2017, no new study has been completed.

Facilities and Infrastructure

El Gallo 1 infrastructure is currently used to support current work on the El Gallo 2. The water supply for the El Gallo 2 project is expected to come from three locally drilled water wells. Required water yields were confirmed through several long‑term pumping tests completed in 2013.

Exploration Properties

Our land position of Exploration Properties in Mexico consists of several claims not associated with a specific project, such as Palmarito and Mina Grande. The Palmarito silver deposit is a historic silver mining area that saw historical production from open pit and underground workings before cessation of mining in the 1950s.

Since 2008, exploration activities across the license areas have included prospecting, as well as stream sediment, soil and rock chip sampling, and most recently an ongoing full district-scale soil geochemistry survey.  This work has in some areas leading to more detailed work including large scale mapping, blasthole drilling and ultimately RC and core drilling programs. This stage-gate approach has led to either a steady progression of work in prospective areas or the suspension of work in less favorable areas. The prioritization of targets has continued based on new data and interpretations. Limited exploration was conducted in 2017. We allocated part of the 2018 budget to continue the exploration work, including multiple drill campaigns to evaluate the highest priority soil geochemistry anomalies identified by our district-scale soil sampling program.

 

 

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SEGMENT: CANADA

 

The following map depicts the location of our major properties included in the Canada segment, which are the Lexam Properties (Fuller, Davidson Tisdale, Buffalo Ankerite and Paymaster), and the Black Fox Complex, (the Black Fox Property (Black Fox Mine, Grey Fox, Froome), Black Fox-Stock mill and Black Fox North). These properties are described below.

Picture 18

The following table summarizes the Canada land position of our Company as of December 31, 2017:

 

 

 

 

 

 

 

 

 

Number of

 

Square

 

Square

Canada Mineral Property Interest

 

Claims

 

Miles

 

Kilometers

Black Fox Property

 

54

 

 7

 

18

Davidson-Tisdale

 

36

 

 2

 

 5

Fuller

 

10

 

 1

 

 2

Paymaster

 

13

 

 1

 

 2

Buffalo Ankerite

 

15

 

 1

 

 2

Total Canada Properties

 

128

 

12

 

29

 

 

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Production Properties

Black Fox Mine, Canada (100% owned)

For detailed information on the Black Fox Mine production statistics and financial results, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview and History

We own 100% of the Black Fox Complex, which includes the Black Fox Mine, Black Fox North and the Black Fox-Stock Mill. We acquired these assets, along with some advanced-stage and exploration properties, in October 2017. The Black Fox Mine refers to the current mining operation and is an underground gold mine. Modern exploration activities at the Black Fox Mine (formerly the Glimmer Mine) started in the late 1990’s.

The Glimmer Mine and surrounding properties started operating in 1997. Commercial production was initiated by Exall Resources Limited and the mine operated over the period 1997 to 2001. Operations were suspended in May 2001 due to low gold prices. The Glimmer Mine was renamed the Black Fox Mine in 2002 and there was no gold production between 2002 and 2008. Brigus Gold Corporation (“Brigus”) restarted the mine following increased gold prices in early 2009. Primero Mining Corp. (“Primero”) acquired Brigus on March 5, 2014. During the period between 2014 and 2016, the mine produced 151,000 ounces of gold. We acquired the property on October 3, 2017, completed the first gold pour in November 2017 and the commercial operations of the mine were unaffected by the acquisition.

The Black Fox Property consists of one block of land comprising 32 parcels and 22 mining titles for a total of 4,324 acres (1,750 hectares) or 6.8 sq. mi (17.5 sq. km). Some parcels and mining titles are subject to royalties. All parcels and mining titles are freehold mining lands (mining patents), mining leases, or licenses of occupation. All required permits are in place.

Location and Access

The Black Fox Complex is located 7 miles (11 km) east of Matheson, Ontario, on Highway 101 East. Matheson, in turn, is located approximately 45 miles (72 km) from Timmins, which has a commercial airport.  Access to the mine is either by paved or well maintained, two‑way, dirt roads.

Geology and Mineralization

The Black Fox Complex is located within the Abitibi greenstone belt. Gold mineralization at the Black Fox Mine occurs in several different geological environments within the main ankerite alteration zone, and generally occurs as: (1) Free gold associated with shallow dipping quartz veins and stockworks in green carbonate and ankerite altered ultramafic rocks; (2) Gold-bearing pyrite; (3) Gold associated with fine-grained pyrite and (4) Free gold in steeply dipping sigmoidal quartz veins.

Facilities and Infrastructure

The Black Fox Mine property has well‑developed infrastructure including electricity, roads and high-speed internet access. There are seven fully serviced modular buildings which support various functions of the underground mine. There is also a maintenance shop, warehouse, compressed air plant, backfill plant and water management facilities. Ore from the Black Fox mine is transported to, and processed at, the Stock Mill, approximately 17 miles (27 km) from the mine.

The primary water supply for the Black Fox Mine comes from an on-site fresh water well, and water produced from dewatering activities is channeled to the holding pond for process recycling and/or discharge through the Black Fox water treatment facility. Current water supplies are adequate to sustain current and planned future operations.

We acquired the Black Fox-Stock Mill as part of the acquisition from Primero in October 2017.  The mill is located approximately 17 miles (27 km) from the Black Fox mine and has a nominal processing capacity of 2,500 tpd. Ore is shipped to the mill from the Black Fox mine by truck.

23


 

The Black Fox-Stock mill is also the site of the former Stock Mine, which produced 137,000 ounces of gold from an underground operation between 1989 and 2005. The surface facilities remain in place with the underground mine now flooded.

The Stock Mill property has well‑developed infrastructure including electricity, roads and high-speed internet access. There are two buildings that support security and administration of the Stock Mill. There is an assay lab and administrative building on site. There are several other buildings to support operations and milling, including a hoist house, warehouse and maintenance shop, mine dry building, crusher and conveyor systems and the mill building itself. The site also houses various support structures including reagent storage and oil storage buildings, reagent distribution building, two standby generator buildings and a potable water building.

We inherited a toll milling agreement with Sage Gold to process ore from the Clavos Gold project.

Reserves

We are in the process of completing our own technical report in respect of the Black Fox mine. In connection with this project we are reviewing this mineral resource.

 

Metal Streaming Agreement

On November 9, 2010, Brigus entered into an agreement with Sandstorm Gold Ltd. (“Sandstorm”) whereby Brigus received up front proceeds of $56.3 million and Sandstorm agreed to purchase 12% of the future gold production from the Black Fox Mine beginning in January 2011 and 10% of future gold production from the Black Fox extension covering a portion of the adjoining Pike River property.  Sandstorm also committed to pay Brigus ongoing payments of $500 per ounce purchased, subject to an inflationary adjustment beginning in 2013, but which would not exceed 2% per annum. Brigus had the option, for a 24-month period, to reduce the Gold Stream Agreement to a minimum of 6% of production from the Black Fox Mine and 4.5% of production from the Black Fox Extension (Pike River) for a payment of $36.6 million. On November 5, 2012, Brigus elected to exercise a portion of the option and repurchased 4% of the Gold stream for $24.4 million. This reduced Sandstorm’s portion of future production at Black Fox to 8% and the Black Fox extension to 6.3%. The Sandstorm agreement was assumed by McEwen as part of the acquisition of the Black Fox Complex. The Company is obligated to sell 8% of current and future gold production from the Black Fox mine and 6.3% at the adjoining Pike River property (Black Fox Extension) to Sandstorm at the lesser of market price or $531 per oz (with inflation adjustments of up to 2% per year) until 2090. The upfront proceeds, representing the uncredited balance, were completely repaid prior to the Company’s acquisition of the properties. 

Advanced-stage Properties

Grey Fox, Canada (100% owned)

Overview and History

The Grey Fox project is an advanced-stage project. It is also 100% owned by our subsidiary McEwen Ontario. The Grey Fox project is not subject to any streaming arrangements. 

An internal feasibility-level study (“Feasibility”) was completed on the Grey Fox project in early 2015 by Primero, which recommended further development of the Grey Fox deposit. At the end of 2015, project engineering, baseline studies,  geotechnical evaluations,  permitting  activities, closure plan preparation, and development  of mine designs and production plans as well as cost estimates had advanced sufficiently to initiate consultation  with the First Nations, the Metis of Ontario and local communities. Subsequently, Primero stopped development work on the project. A final decision to proceed with development of Grey Fox has not been made and alternatives to reduce capital and operating costs continue to be examined by the Company. Any decision to proceed would be dependent on improved gold price expectations and improved project economics.

Access and Location

The Grey Fox project is located 2.2 miles (3.5 km) south of Black Fox Mine, and is directly adjacent to Kirkland Lake’s Hislop mine. Access is either by paved or well maintained, two‑way, dirt roads.

24


 

Facilities and Infrastructure

There is no infrastructure at the Grey Fox property.

Froome, Canada (100% Owned)

Overview and History

The Froome project was discovered by Primero in early 2015.

Access and Location

The Froome deposit is located 0.6 miles (1 km) west of the Black Fox Mine. The deposit is accessible by either paved or well maintained, two-way, dirt roads.

Facilities and Infrastructure

Due to the proximity of Froome to the Black Fox mine, existing infrastructure from Black Fox can be utilized on this project.  We will continue evaluating to determine the viability of future production from this deposit.

Exploration Properties

We acquired the Lexam properties in connection with the acquisition of Lexan in April 2017. Each of these properties (Buffalo Ankerite, Davidson Tisdale, Fuller and Paymaster) is adjacent to either a previous mining operation or an existing one.  There is limited infrastructure on the properties. The company is evaluating synergies that could come as a result of using the Black Fox - Stock Mill to process material from these properties, which is about 30 miles (50 km) away from the mill to the west.

Buffalo Ankerite, Canada (100% Owned)

We control a 100% interest in the Buffalo Ankerite Property, which is located 3.5 miles (5.6 km) southeast of Timmins, in northeastern Ontario. Production took place between 1926 and 1953 and included a 4,000 ft. (1,220 meter) deep shaft. In early 2007, Lexam began exploring for both near surface and deep gold mineralization.

Fuller, Canada (100% Owned)

The Fuller Property is comprised of 13 claims covering 519 acres (210 hectares) in Tisdale Township, approximately 3 km southeast of Timmins, Ontario.

Paymaster, Canada (61.01% Owned)

In June 2008, Lexam entered a four-year option agreement with Goldcorp Inc. (“Goldcorp”) to acquire a 60% interest in 15 patented mining claims that are adjacent to and on strike of the gold mineralized zones situated on the Fuller Property and the Buffalo Ankerite Property. In June 2012, Lexam completed its earn-in requirements and acquired a 60% interest in the Paymaster Property. On September 20, 2013, Lexam received formal notification from Goldcorp indicating that they would not participate in the 2013 exploration program. As Goldcorp continued its nonparticipation in subsequent years, Goldcorp’s 40% ownership was diluted in accordance with terms stipulated in the joint venture agreement. As of December 31, 2017, McEwen increased its interest in the Paymaster Property to 61%.

Davidson Tisdale, Canada (100% Owned)

We own 100% of the Davidson Tisdale property, covering 1,134 acres (460 hectares) from 25.5 claims. The Davidson Tisdale Property hosts gold in the Main Zone and the S-Zone mineralized structures, which are developed by a 550 foot (168 meter) deep decline ramp with five mine levels. Permitting activities have been carried out over previous years. Upon completion of additional permitting, we envision a surface bulk sample as the initial mining work, leading to an open pit operation before the commencement of underground mining. Additional exploration potential exists at depth, below the underground mine workings.

25


 

Other Exploration Properties

Black Fox North, Canada (100% Owned)

We own 100% of the Black Fox North property, covering 207.7 acres (84 hectares) from 10 claims, and located 2.5 miles (4 km) north of Black Fox Mine. The Black Fox North Property is underlain by mafic and felsic volcanic flows to the northeast and sedimentary rocks to the southwest. The volcanic and sedimentary sequences are separated by the northwest-southeast striking Pipestone Fault. The Pipestone fault is known to host mineralization. To date, no gold mineralization has been identified on the property. Soil surveys across the property, as well as the presence of bimodal volcanism, suggest the potential for base metal mineralization on the property.

SEGMENT: MINERA SANTA CRUZ (“MSC”)

The following map depicts the location of our major properties included in the MSC segment which are the San José mine and other concessions located around the mine:

Picture 16

Production Properties

San José mine, Argentina (49% owned)

For detailed information on the San José mine production statistics and financial results, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview and History

The San Jose mine is an underground gold and silver mining operation.  We acquired our interest in the San José mine in connection with our acquisition of Minera Andes in January 2012. The property is owned and operated under an option and joint venture agreement (“OJVA”) between Minera Andes (49%) and Hochschild (51%) in the name of MSC. The

26


 

property was acquired by Minera Andes in 1997, following the completion of a regional geological study. Minera Andes carried out an intensive exploration program from 1997 to 2001, leading to the discovery of the Huevos Verdes and Saavedra West Zones. A feasibility study was completed in October 2005 under the direction of MSC and the decision to proceed to production was made on March 28, 2006. Plant, infrastructure construction and mine development continued from July 2006 to September 2007 and commercial production was declared on January 1, 2008. 

The San José mine is an underground operation located approximately 12 miles (20 km) north of Goldcorp’s Cerro Negro project in the northwest corner of the Deseado Massif region in the Province of Santa Cruz in Argentina. The mine is part of a larger property which covers a total area of approximately 1,074 sq. miles. (2,781 sq. km) and consists of 135 mining concessions

Location and Access

The San José property is in the province of Santa Cruz, Argentina, lying approximately between latitude 46°41’S and 46°47’S and longitude 70°17’W and 70°00’W. The mine is 1,087 miles (1,750 km) south‑southwest of the city of Buenos Aires and 217 miles (350 km) southwest of the Atlantic port city of Comodoro Rivadavia. The principal access route to the San José property is a paved highway from Comodoro Rivadavia unto an unsealed 20-mile (32 km) two-lane dirt road section to the mine. Comodoro Rivadavia has regularly-scheduled air services to Buenos Aires. The nearest town is Perito Moreno, which is approximately 19 miles (30 kilometers) west of the San José property. The main structural trend of fault and vein systems on the property is in directions within the northwest quadrant. 

Geology and Mineralization

The San José property is in the Deseado Massif, which consists of Paleozoic metamorphic basement rocks uncomfortably overlain by Middle to Upper Jurassic bimodal andesitic and rhyolitic volcanics and volcaniclastics. Cretaceous sediments and Tertiary to Quaternary basalts overlie the Jurassic volcanics. The Jurassic Bajo Pobre Formation is the main host of gold and silver vein mineralization at the mine. The formation is comprised of a lower andesite volcaniclastic unit and an upper andesite lava flow and has a maximum thickness of 394 ft. (120 meters). Mineralization in the San José area occurs as low sulfidation epithermal quartz veins, breccias and stockwork systems accompanying normal‑sinistral faults striking 330° to 340°.

Facilities and Infrastructure

Infrastructure at the property consists of camp facilities that can accommodate up to approximately 1,100 personnel, a medical clinic, a security building, a maintenance shop, a laboratory, processing facilities, a mine and process facility warehouse, a surface tailings impoundment, support buildings and mine portals, a change house, a core warehouse, an administration building and offices. The laboratory is equipped to process all assays (core, chips and soil) and incorporates fire assaying and atomic absorption equipment. MSC has installed a satellite‑based telephone/data/internet communication system.

Electricity is provided by an 81‑mile (130 km) 132 kV electric transmission line, which was constructed in 2009 and connects the San José mine processing facility to the national power grid.

The San José mine is a ramp access underground mining operation.

Exploration Activities

MSC has purchased the land and corresponding occupation rights that are necessary to conduct its operations. All of the known mineralized zones, mineral resources and mineral reserves and active mine workings, existing tailing ponds and waste are within MSC’s concessions.

During 2017, approximately 33,661 feet (10,260 meters) were drilled in Aguas Vivas, Juanita, Platífero and Nueva-1 areas. For 2018 the approved budget considers approximately 24,803 feet (7,560 meters) in the San José area. In 2017, MSC secured surface land access for exploration and eventual mine development if successful through a 30-year agreement with the land owners. However, if the Aguas Vivas results from 2017 and the drilling in the San José area have positive results then additional meters will be drilled in 2018.

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Reserves

The reserves information for the San José mine as at December 31, 2017, on a 100% basis, was prepared by Hochschild and audited by P&E Mining Consultants Inc. (“P&E”). In its report dated February 4, 2018, P&E concluded that the reserve estimates for the San José mine prepared by Hochschild provide a reliable estimation of reserves in accordance with the standards of the Joint Ore Reserve Committee of the Australian Institute of Mining and Metallurgy (“JORC”), NI 43‑101, the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”) best practices and SEC Industry Guide 7.

The mineral reserves were estimated using metal prices of $1,200 per ounce of gold and $16.5 per ounce of silver with a marginal revenue cut‑off value of $101.63 per tonne. The reserves, as presented, are in‑place and include mining dilution and mining losses, but do not include allowances for mill or smelter recoveries.

The following table summarizes 100% of proven and probable gold and silver reserves of the San José mine, as of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Tonnes

    

Silver

    

Silver ounces

    

Gold

    

Gold ounces

 

Reserve Category

 

(in thousands)

 

(grams/tonne)

 

(in millions)

 

(grams/tonne)

 

(in thousands)

 

Proven

 

973

 

490

 

15.3

 

6.99

 

219

 

Probable

 

434

 

384

 

5.4

 

6.74

 

94

 

Proven & Probable

 

1,407

 

457

 

20.7

 

6.92

 

313

 

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SEGMENT: USA

The following map depicts the location of our major properties in the USA segment, including the Gold Bar project currently under construction and exploration properties which are fully owned by us or subject to joint venture agreements:

 

Picture 1

 

The following table summarizes the land position of our properties in Nevada as of December 31, 2017:

 

 

 

 

 

 

 

 

    

Number of

    

Square

    

Square

USA Mineral Property Interest

 

Claims

 

Miles

 

Kilometers

Gold Bar Complex

 

1,207

 

39

 

101

Tonkin Complex

 

1,390

 

45

 

116

Limo Complex

 

665

 

21

 

56

Battle Mountain Complex

 

573

 

19

 

48

Other United States Properties

 

1,457

 

47

 

122

Total USA Properties

 

5,292

 

171

 

443

 

29


 

Advanced-stage Properties

Gold Bar Project, Nevada (100% owned)

Overview and History

The Gold Bar Project is a proposed open pit gold mine with an oxide heap leach recovery circuit. Construction work commenced in late 2017 following receipt of the final permit.

The property is located within the Battle Mountain-Eureka-Cortez gold trend in Eureka County, central Nevada. The property was previously mined from 1987 to 1994 by Atlas Precious Metals Inc. We commenced the formal permitting process to recommence mining in 2012.

On February 15, 2018, we announced the results of a definitive FS, which will be filed on SEDAR. The FS is compliant with NI 43-101 and the reserve estimate is compliant with SEC Industry Guide 7. Based on the FS, initial capital expenditures for the project are estimated at $80.8 million including an allocation of $4.6 million for contingencies.

Location and Access

The Gold Bar project is in the Roberts Creek Mountains, in Eureka County, Nevada, approximately 30 miles (48 km) northwest of the town of Eureka, Nevada, primarily in Township 22 North, Range 50 East (N39°48’16.5”; W116°21’09.65”).  The project site is accessed by traveling 25 miles (40 km) west on US Highway 50 from Eureka, the nearest town. Travel is then 16 miles (26 km) north on the Three Bars Road, a gravel, all-weather road maintained by Eureka County. The project area is approximately 15 miles (24 km) from the end of Three Bars Road, and is accessed through unimproved dirt roads that are not maintained by the county.

Geology and Mineralization

The project is located in the Battle Mountain‑Eureka mineral belt in a large window of lower‑plate carbonate rocks surrounded by upper‑plate rocks. The lower‑plate carbonates consist of an east‑dipping section of Silurian Lone Mountain Dolomite, Devonian McColley Canyon Formation, Devonian Denay Formation, and Devonian Devils Gate Limestone (from oldest to youngest). Gold mineralization is hosted primarily in the Bartine Member of the McColley Canyon Formation, which consists of carbonate wackestones and packstones approximately 250 to 380 feet thick. Minor amounts of mineralization are found in the underlying dolomitic limestone Kobeh Member of the McColley Canyon Formation where it is adjacent to apparent feeder structures. The area where the project is located has “Carlin‑Type” sediment‑hosted gold mineralization characteristics with typical associated alteration (decalcification, silicification).

Facilities and Infrastructure

At present, temporary facilities and infrastructure exist at the Gold Bar project site in support of ongoing construction activities. These items include a temporary water supply and power generation, as well as modular offices.

Gold Bar Project construction began immediately upon receipt of the final permit on November 8, 2017. Key activities conducted during November and December 2017 were:

·

Engineering and procurement of major capital equipment items;

·

Onsite mobilization of all major contractors;

·

Site clearance and initial preparation for 2018 civil work was largely completed;

·

Installed temporary offices, communications equipment, water, and power;

·

Began installation of mine water supply system;

30


 

·

Mine development underway at Cabin Creek pit, which will be the initial source of production. 

Exploration Activities

Since the formal permitting process began in 2012, we did not perform any drilling activities within the production area subject to the Plan of Operations (“POO”). We did, however, drill and pump-tested one potential water well location for future mining operations.  We drilled 33 holes in 2015 which were primarily in previously disturbed areas of the pit. No other exploration occurred between 2016 and November 2017. In December 2017, a series of near pit limit exploration targets were initiated at the Gold Bar project. The total program footage will be determined by program success. The program is expected to continue throughout the first quarter of 2018. 

Permitting Activities

The Gold Bar project is fully permitted for construction. State permits required for operations are all expected to be received prior to commencement of operations, which is expected for the fourth quarter of 2018.

Proven or Probable Reserves

The mineral reserves at the Gold Bar project were estimated using gold price of $1,000 per ounce, and a cut-off grade of 2.26 g/t. The reserves, as presented, are in‑place and include mining dilution and mining losses, but do not include allowances for mill or smelter recoveries.  The reserve estimate was prepared by Independent Mining Consultant of Tucson, Arizona.

The following table summarizes estimated proven and probable gold reserves recoverable of the Gold Bar project, as of December 31, 2017:

 

 

 

 

 

 

 

 

    

Tonnes

    

Gold

    

Gold ounces

Reserve Category

 

(in thousands)

 

(grams/tonne)

 

(in thousands)

Proven

 

2,253

 

1.27

 

83

Probable

 

14,244

 

0.97

 

401

Proven & Probable

 

16,497

 

1.01

 

484

 

Exploration Properties

Tonkin property (100% owned)

The Tonkin property represents our largest holding within the Battle Mountain‑Eureka Trend in Eureka County, Nevada with  approximately 43 sq. miles (113 sq. km). The Tonkin property consists of the Tonkin Springs deposit and the previously operating Tonkin mine.

From 1985 through 1989, the Tonkin mine produced approximately 30,000 ounces of gold utilizing an oxide heap leach and a separate ball mill involving bio oxidation to treat refractory sulphide ore. Due to cost escalation and recovery issues, the operation was shut down and not restarted. The mine site is currently on care-and-maintenance and we continue to advance the reclamation program. We also continue evaluation work with respect to the Tonkin Springs deposit. No significant drilling took place in 2017.

Other Exploration Properties

No significant drilling or exploration activities took place in any of these properties during the year 2017. The Company continues to rationalize its mineral property interests in Nevada in an effort to focus its exploration efforts on prospective areas.

31


 

SEGMENT: LOS AZULES

Exploration Properties

The following map depicts the location of our major exploration properties in the Los Azules segment in two distinct exploration projects at Los Azules and Chonchones, in the province of San Juan in Argentina.  Los Azules is the more advanced and significant project at this time.

Picture 10

 

32


 

The following table summarizes the land position related to Los Azules segment as of December 31, 2017:

 

 

 

 

 

 

 

 

    

Number of

    

Square

    

Square

Argentina Mineral Property Interest

 

Claims

 

Miles

 

Kilometers

Los Azules project

 

331

 

145

 

376

Chonchones project

 

139

 

67

 

173

Lagañoso project

 

49

 

19

 

49

La Cerrada project

 

118

 

51

 

132

Other Argentina properties

 

31

 

58

 

150

Total Argentina Properties

 

668

 

340

 

880

 

Los Azules Copper Project, Argentina (100% owned)

Overview and History

The Los Azules copper project is a 100% owned advanced‑stage porphyry copper exploration project located in the cordilleran region in the province of San Juan, Argentina near the border with Chile. In 1994, Minera Andes acquired lands in the southern portion of the Los Azules area. Over the years there was additional exploration done by Minera Andes and other companies who owned adjacent properties around Los Azules. We acquired this property, along with other Argentina exploration properties and our interest in the San José mine, as part of with the acquisition of Minera Andes in January 2012.

Location and Access

The project is located at approximately 31o 13’30” South latitude and 70o 13’50” West longitude and about 4 miles (6 km) east of the Chile‑Argentina border. It is accessible by unimproved dirt roads with seasonal closures in winter. The elevation at the site ranges between 11,500 feet to 14,750 feet (3,500 meters to 4,200 meters) above sea level.

Geology and Mineralization

The deposit is located within a copper porphyry belt that is host to some of the world’s largest copper mines. The upper part of the system consists of a barren leached cap, which is underlain by a high‑grade secondary enrichment blanket. Primary mineralization below the secondary enrichment zone has been intersected in drilling up to a depth of more than 3,280 feet (1,000 meters) below surface.

Exploration Activities

Drilling conditions in the area are difficult, especially due to the presence of highly faulted zones and areas of loose surface scree or talus. Due to snow conditions on two mountain passes on the access road to the site, seasonal exploration typically commences in December and extends into late April or early May. Drilling programs have been undertaken at Los Azules between 1998 and 2014 and in 2017 by four different mineral exploration companies: Battle Mountain Gold (now Newmont Mining Inc.), Mount Isa Mines S.A. (now Glencore Plc.), Minera Andes and McEwen Mining. Drilling, including early reverse circulation programs, focused initially on gold exploration and subsequently on diamond drilling for porphyry style copper mineralization. From 1998 until the second quarter of 2013, a total of 201,764 ft. (61,141 m.) were drilled on the property. No significant drilling took place between third quarter of 2013 and fourth quarter of 2016 as we focused on baseline studies regarding flora, fauna, water quality and other environmental compliance matters. In 2017, a total of 21,451 ft. (6,500 m.) was drilled bringing total drilling done to date at Los Azules to 223,215 ft. (67,641 m.)

During the third quarter of 2017 we completed an updated 43-101 Preliminary Economic Assessment (“PEA”), results of which were announced on September 7, 2017.

Facilities and Infrastructure

There are currently limited facilities or infrastructure located at the project site which mainly includes portable camp structures and drill platforms.

33


 

Other Exploration Properties

Our other exploration properties are located in the Province of San Juan. No significant exploration activities took place during 2017.

 

ITEM 3.  LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings, other than the tax matter described under the risk “Our operations in Argentina and Mexico are subject to political and social risks” included in Item 1A. Risk Factors.  To the best of our knowledge, no such proceeding is threatened, the results of which would have a material impact on our properties, results of operations, or financial condition. Nor, to the best of our knowledge, are any of our officers or directors involved in any legal proceedings in which we are an adverse party.

ITEM 4.  MINE SAFETY DISCLOSURES

As we have no operating mines located in the U.S. or any of its territories, the disclosure required by this Item is not applicable.

 

34


 

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

On January 24, 2012, our common stock commenced trading on the NYSE and TSX under the symbol “MUX”, subsequent to the completion of the acquisition of Minera Andes. Exchangeable shares of McEwen Mining—Minera Andes Canadian Acquisition Corp. (“Exchange Co.”) traded on the TSX, under the symbol “MAQ” until August 2016, when all the outstanding exchangeable shares were redeemed.

The table below sets forth the high and low sales prices for our common stock on a quarterly basis as reported by the NYSE and TSX from January 1, 2016 to December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NYSE

 

TSX (C$)

 

 

    

High

    

Low

    

High

    

Low

 

Year ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

4.43

 

$

2.84

 

$

5.83

 

$

3.84

 

Second Quarter

 

 

3.30

 

 

2.47

 

 

4.40

 

 

3.30

 

Third Quarter

 

 

2.86

 

 

1.94

 

 

3.53

 

 

2.40

 

Fourth Quarter

 

 

2.38

 

 

1.82

 

 

2.97

 

 

2.33

 

Year ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

2.13

 

$

0.96

 

$

2.84

 

$

1.41

 

Second Quarter

 

 

3.85

 

 

1.80

 

 

4.99

 

 

2.36

 

Third Quarter

 

 

4.92

 

 

3.33

 

 

6.44

 

 

4.38

 

Fourth Quarter

 

 

3.74

 

 

2.51

 

 

4.93

 

 

3.40

 

 

As of February 20, 2018, there were 337,054,594 shares of our common stock outstanding, which were held by approximately 4,559 stockholders of record. As noted above, the exchangeable shares were fully redeemed in the third quarter of 2016. 

Transfer Agent

Computershare Investor Services Inc. is the transfer agent for our common stock. The principal office of Computershare is 250 Royall Street, Canton, Massachusetts, 02021 and its telephone number is (303) 262‑0600. The transfer agent in Canada is Computershare Investor Services at 100 University Ave., 8th Floor, Toronto ON, M5J 2Y1 and its telephone number is 1‑800‑564‑6253.

Dividend Policy

On June 18, 2015, our Board of Directors declared the first dividend, which at that time was characterized as a return of capital since we have accumulated losses from operations and did not have retained earnings. This was the first distribution or return of capital since inception.  The distribution was declared as $0.01 per share of common stock, payable semi-annually.  The first semi-annual distribution of $0.005 per share was paid on August 17, 2015, with further distributions paid semi-annually through 2017. The latest semi-annual distribution of $0.005 per share was paid on February 14, 2018.  Whether future distributions will be declared depends upon our future growth, results of operations and cash needs.

When we issued the semi-annual distributions during 2017, an assessment was made that the distribution would be treated as a return of capital, since we expected to report a net loss and did not have retained earnings. This assessment was the support required to characterize the distributions as return of capital. In light of the Tax and Jobs Act, enacted on December 22, 2017, we incurred a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax-deferred. As a result of the inclusion of our subsidiaries’ foreign earnings, we now expect to report net income for tax purposes. As a result, the distributions made during 2017 have been re-characterized as taxable dividends. 

Purchases of Equity Securities by the Company

The repurchase plan under which we were authorized to repurchase a portion of our stock expired on September 30, 2016. We did not make any repurchases since this time.

35


 

Securities Authorized for Issuance Under Equity Compensation Plans

Set out below is information as of December 31, 2017 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance. This information relates to our Amended and Restated Equity Incentive Plan.

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted‑average

    

Number of securities

 

 

 

Number of securities to

 

exercise price per

 

remaining available for

 

 

 

be issued upon exercise

 

share of outstanding

 

future issuance under equity

 

Plan Category

 

of outstanding options

 

options

 

compensation plans

 

Equity compensation plans approved by security holders

 

4,905,299

 

$

2.44

 

5,283,137

 

Equity compensation plans not approved by security holders(1)

 

46,796

 

 

C$1.79

 

 

Total

 

4,952,095

 

 

 

 

5,283,137

 


(1)

In connection with the acquisition of Lexam VG Gold, on April 27, 2017, we assumed stock options covering 54,264 shares of our common stock and are exercisable at a price of C$1.79.  Following the forfeiture of 7,468 options, a total of 46,796 options remained exercisable at December 31, 2017.

The options that we assumed in connection with the 2017 acquisition were not approved by our security holders. We are not authorized to issue any additional options under any of these plans.

Performance Graph

The following graph compares our cumulative total shareholder return for the five years ended December 31, 2017 with (i) the NYSE Arca Gold Bugs Index, which is an index of companies involved in the gold industry and (ii) the NYSE Composite Index, which is a performance indicator of the overall stock market. The graph assumes a $100 investment on December 31, 2012 in our common stock and the two other stock market indices, and assumes the reinvestment of dividends, if any.

 

Picture 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2012

    

2013

    

2014

    

2015

    

2016

    

2017

 

McEwen Mining (MUX)

 

$

100

 

$

51

 

$

29

 

$

28

 

$

77

 

$

60

 

NYSE Arca Gold Bugs Index

 

 

100

 

 

45

 

 

37

 

 

25

 

 

41

 

 

43

 

NYSE Composite Index

 

 

100

 

 

123

 

 

128

 

 

120

 

 

131

 

 

152

 

 

 

36


 

ITEM 6.  SELECTED FINANCIAL DATA

The following table summarizes certain selected historical financial data about our Company for the last five years. The data has been derived from our audited consolidated financial statements for the years indicated. You should read this data in conjunction with the MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and our audited consolidated financial statements contained herein. All amounts are stated in thousands of U.S. dollars unless otherwise indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

(in thousands, except per share amounts)

 

Operating data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue(1)

 

$

67,724

 

$

60,388

 

$

72,956

 

$

45,303

 

$

45,982

 

(Loss) income on investment in Minera Santa Cruz S.A.

 

 

(44)

 

 

12,951

 

 

2,414

 

 

(5,284)

 

 

846

 

Operating (loss) income(2)

 

 

(26,027)

 

 

15,347

 

 

(49,333)

 

 

(410,191)

 

 

(200,397)

 

Other income (expenses)

 

 

24

 

 

1,959

 

 

4,323

 

 

(8,922)

 

 

(710)

 

Net (loss) income(2)

 

 

(10,634)

 

 

21,055

 

 

(20,450)

 

 

(311,943)

 

 

(147,742)

 

Basic (loss) income per share

 

$

(0.03)

 

$

0.07

 

$

(0.07)

 

$

(1.05)

 

$

(0.50)

 

Diluted (loss) income per share

 

 

(0.03)

 

 

0.07

 

 

(0.07)

 

 

(1.05)

 

 

(0.50)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at December 31,

 

 

    

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

(in thousands)

 

Balance sheet data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,153

 

$

37,440

 

$

25,874

 

$

12,380

 

$

24,321

 

Investments

 

 

7,971

 

 

8,543

 

 

1,032

 

 

1,082

 

 

 2

 

IVA taxes receivable

 

 

5,250

 

 

4,304

 

 

10,032

 

 

11,739

 

 

11,591

 

Inventories

 

 

31,951

 

 

26,620

 

 

14,975

 

 

12,404

 

 

8,800

 

Restricted cash

 

 

10,000

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Property and equipment, net

 

 

51,046

 

 

14,252

 

 

15,759

 

 

17,896

 

 

15,143

 

Mineral property interests

 

 

293,437

 

 

242,640

 

 

237,245

 

 

287,812

 

 

642,968

 

Investment in Minera Santa Cruz S.A.

 

 

150,064

 

 

162,320

 

 

167,107

 

 

177,018

 

 

212,947

 

Other assets

 

 

15,257

 

 

2,199

 

 

3,061

 

 

2,627

 

 

7,294

 

Total assets

 

$

592,129

 

$

498,318

 

$

475,085

 

$

522,958

 

$

923,066

 

Current liabilities

 

$

37,639

 

$

20,581

 

$

22,039

 

$

24,082

 

$

11,189

 

Deferred income and mining tax liability

 

 

8,430

 

 

23,665

 

 

26,899

 

 

51,899

 

 

158,855

 

Capital lease liabilities, less current portion

 

 

81

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other long‑term liabilities

 

 

24,706

 

 

11,033

 

 

7,855

 

 

5,763

 

 

6,255

 

Shareholders’ equity

 

 

521,273

 

 

443,039

 

 

418,292

 

 

441,214

 

 

746,767

 

Total liabilities and shareholders’ equity

 

$

592,129

 

$

498,318

 

$

475,085

 

$

522,958

 

$

923,066

 


(1)

Includes revenue from the sale of gold from the Black Fox mine, part of the Black Fox Complex acquired in October 2017.

(2)

Includes a non‑cash expense of $711, $50,600, $353,736, and $62,963 relating to the write‑downs of mineral property interests, and property and equipment in 2017, 2015, 2014, and 2013, respectively. Also includes a non‑cash expense of $11,777, $21,162 and $95,878 relating to the write‑down of our investment in Minera Santa Cruz S.A. in 2015, 2014 and 2013, respectively.

37


 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion updates our plan of operations as of February 21, 2018 for the foreseeable future.  It also discusses our results of operations for the three fiscal years ended December 31, 2017, 2016 and 2015 and our financial condition as at December 31, 2017 and 2016, with a particular emphasis on the year ended December 31, 2017. With regard to properties or projects that are not in production, we provide some details of our plan of operation.

The discussion also presents certain non‑GAAP financial performance measures, such as earnings from mining operations, total cash costs, total cash cost per ounce, all‑in sustaining costs, all‑in sustaining cost per ounce, average realized price per ounce, and cash, investments and precious metals, that are important to management in its evaluation of our operating results and which are used by management to compare our performance to what we perceive to be peer group mining companies and relied on as part of management’s decision‑making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non‑GAAP financial performance measures and certain limitations inherent in such measures, please see the discussion under “Non‑GAAP Financial Performance Measures” below, on page 55.

The discussion also includes references to “Advanced-stage Properties”, which are defined as properties for which advanced studies and reports have been completed indicating the presence of mineralized material or proven and probable reserves, and that have obtained or are in the process of obtaining the required permitting. Our designation of certain properties as “Advanced-stage Properties” should not suggest that we have proven or probable reserves at those properties as defined by the SEC Industry Guide 7.

The information in this section should be read in conjunction with our consolidated financial statements and the notes thereto included in this annual report. 

Reliability of Information: MSC, the owner of the San José mine, is responsible for and has supplied to us all reported results from the San José mine. The technical information regarding the San José mine contained herein is, with few exceptions as noted, based entirely on information provided to us by MSC. Our joint venture partner, a subsidiary of Hochschild Mining plc, and its affiliates other than MSC do not accept responsibility for the use of project data or the adequacy or accuracy of this document.

 

38


 

Index to Management’s Discussion and Analysis:

 

 

 

Page

2017 Operating and Financial Highlights 

39

Selected Consolidated Financial and Operating Results 

40

Consolidated Financial Performance 

40

Results of Consolidated Operations 

41

Liquidity and Capital Resources 

43

Results of Operations 

44

Mexico Segment 

44

El Gallo 1 mine operating results 

44

Advanced-stage Properties – El Gallo 2 project 

47

Exploration Properties – El Gallo properties 

47

Canada Segment 

48

Black Fox mine operating results 

48

Timmins Exploration activities 

49

MSC Segment 

50

MSC operating results 

50

U.S.A Segment 

54

Advanced-stage Properties – Gold Bar project 

54

Los Azules Segment 

55

Los Azules exploration property 

55

Commitments and Contingencies 

55

Non-GAAP Financial Performance Measures 

55

Critical Accounting Estimates 

61

Forward Looking Statements 

65

Risk Factors Impacting Forward-Looking Statements 

66

 

2017 Operating and Financial Highlights

2017 highlights are included below and discussed further in Consolidated Performance:

·

In 2017, we entered the Canadian mining market after acquiring the Lexam group of properties, located in the Timmins gold district of Canada. Later in the year, we acquired the Black Fox Complex, comprised of the Black Fox underground gold mine, the Black Fox Stock mill, and the Grey Fox and Froome development projects, complementing the Lexam properties and enhancing our positioning in the region.

 

·

We began construction of the Gold Bar project after receiving the final permitting on November 8, 2017.  Commercial production from Gold Bar is expected to be achieved in the first quarter of 2019.

 

·

We completed a Preliminary Economic Assessment (“PEA”) for the Los Azules Project, estimating an economical project and the opportunity for a sustainable and long-life open pit mine at current copper, gold and silver prices.

 

·

We completed two financings for total gross proceeds of $56.6 million, primarily for the purpose of funding the acquisition of the Black Fox Complex and finance the 2018 exploration program in Timmins.

 

·

Our consolidated gold and silver sales were $67.5 million in 2017, comprised of $55.9 million from the sale of 44,490 gold equivalent ounces by our El Gallo 1 mine, and $11.6 million from the sale of 9,422 gold ounces by our Black Fox mine.

 

·

We realized average prices of $1,255 and $17.40 per ounce of gold and silver, respectively, sold by the El Gallo 1 mine, and an average price of $1,233 per ounce of gold sold by the Black Fox mine.

 

·

Our consolidated production was 60,973 gold equivalent ounces, comprised of 46,694 gold equivalent ounces produced by the El Gallo 1 mine and 14,279 gold equivalent ounces produced by the Black Fox mine.

 

·

The San José mine produced 186,443 gold equivalent ounces, comprised of 100,475 ounces of gold and 6,447,657 ounces of silver, on a 100% basis; or 91,357 gold equivalent ounces, represented by 49,233 ounces of gold and 3,159,352 ounces of silver, based on the 49% share attributable to us.

39


 

 

·

The El Gallo 1 mine realized total cash costs of $791 and all-in sustaining costs of $909 per gold equivalent ounce, respectively.

 

·

The Black Fox mine realized total cash costs of $865 and all-in sustaining costs of $1,319 per gold equivalent ounce, respectively.

 

·

The San José mine realized total cash costs of $839 and all-in sustaining costs of $1,027 per gold equivalent ounce, respectively.

 

·

We reported a net loss of $10.6 million, or $0.03 per share for the year.

 

·

We realized net loss of $0.1 million from our investment in MSC, and received $12.2 million in dividends.

 

·

At year end, we reported $68.1 million in cash and restricted cash, investments and precious metals valued at the London P.M. Fix spot price(1), and no bank debt.  Restricted cash represents proceeds from a financing that is committed to the exploration program in Ontario.


(1)

For a reconciliation of precious metals valued at the London P.M. Fix spot price and cost, please see the discussion under “Non GAAP Financial Performance Measures” below, on page 55. 

 

Selected Consolidated Financial and Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Year ended

 

 

 

December 31,

 

December 31,

 

 

    

2017

    

2016

    

2017

    

2016

  

2015

 

 

 

(in thousands, unless otherwise indicated)

 

Gold and silver sales El Gallo 1 mine

 

$

12,472

 

$

11,162

 

$

55,845

 

$

60,388

 

$

72,956

 

Gold and silver sales Black Fox mine

 

$

11,620

 

$

 —

 

$

11,620

 

$

 —

 

$

 —

 

Income (loss) on investment in MSC, net of amortization

 

$

491

 

$

(838)

 

$

(44)

 

$

12,951

 

$

2,414

 

Net (loss) income

 

$

2,169

 

$

(4,491)

 

$

(10,634)

 

$

21,055

 

$

(20,450)

 

Net (loss) income per common share

 

$

0.01

 

$

(0.01)

 

$

(0.03)

 

$

0.07

 

$

(0.07)

 

Consolidated gold ounces(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Produced

 

 

48.6

 

 

20.3

 

 

109.9

 

 

101.5

 

 

110.3

 

Sold

 

 

33.3

 

 

21.9

 

 

102.4

 

 

97.6

 

 

105.7

 

Consolidated silver ounces(1):